<&n  ;<'.-. 


rw 


?if-'> 


-m 


Digitized  by  the  Internet  Archive 

in  2007  with  funding  from 

IVIicrosoft  Corporation 


http://www.archive.org/details/businessstatisti'OOcoperiGh 


HARVARD   BUSINESS  STUDIES 
VOLUME  III 


HARVARD  BUSINESS 
STUDIES 

I.  Scientific  Management.  Edited 
by  C.  B.  Thompson.         $4.00  net. 

II.  An  Approach  to  Business  Prob- 
lems.  By  A.W.  Shaw.     $2.00  net. 

III.  Business  Statistics.     Edited  by 
M.  T.  Copeland.  $3.75  net. 


HARVARD  UNIVERSITY  PRESS 

CAMBRIDGE,  MASS.,  U.S.A. 


BUSINESS  STATISTICS 


EDITED  BY  f/JU\.f^ 

MELVIN  T.  COPELAND,  Ph.D. 

ASSISTANT  PROFESSOR  OF  MARKETING 

DIRECTOR  OF  BUREAU  OF  BUSINESS  RESEARCH 

HARVARD  UNIVERSITY 


iisg:  ED 


CAMBRIDGE 
HARVARD  UNIVERSITY  PRESS 

LONDON:  HUMPHREY  MH-FORD 

Oxford  University  Press 

I917 


^^y 


v-^ 


COPYRIGHT,  1917 
HARVARD  UNIVERSITY  PRESS 


PREFACE 

This  book  has  been  prepared  to  bring  together,  in  a  form  acces- 
sible for  class  use,  scattered  articles  and  selections  upon  the  sub- 
ject of  business  statistics.  It  is  designed  primarily  for  purposes 
of  instruction  in  the  course  in  Business  Statistics  in  the  Harvard 
Graduate  School  of  Business  Administration.  The  subject  is  one 
to  which  scientific  attention  has  only  recently  been  directed; 
consequently  there  is  a  dearth  of  published  material  which  is 
strictly  scientific.  For  this  reason  some  selections  have  been  in- 
cluded which  are  not  fully  satisfactory  but  which  suggestively 
furnish  a  basis  for  class  discussion.  The  inclusion  of  any  selec- 
tion does  not  imply  that  the  methods  used  or  the  conclusions 
reached  meet  with  the  editor's  full  approval. 

Business  statistics,  it  may  be  stated,  are  numerical  statements 
of  facts,  exclusive  of  financial  accounts,  which  are  used  in  busi- 
ness administration.  These  statistics  are  of  two  general  classes  — 
(i)  external  statistics,  generally  publicly  available,  which  indicate 
the  general  trend  of  business  and  market  conditions,  and  (2)  in- 
ternal statistics,  which  are  concerned  with  the  private  operations 
of  an  individual  business  establishment.  Examples  of  the  first 
class  are  the  statistics  of  manufactures,  agriculture,  and  popula- 
tion collected  by  the  United  States  Bureau  of  the  Census,  railroad 
and  other  public  utility  statistics  published  by  the  Interstate 
Commerce  Commission  and  by  state  commissions,  banking  and 
financial  statistics  published  in  the  financial  journals,  price  and 
production  statistics  published  in  trade  papers,  and  the  reports 
of  trade  associations.  Internal  statistics  include  those  obtained 
from  the  sales,  advertising,  and  factory  reports  of  an  individual 
firm  or  company.  Such  reports  and  records  are  used  in  business 
establishments  of  all  sorts,  both  large  and  small.  In  fact  success- 
ful business  administration  depends  to  a  large  degree  upon  these 
reports  and  records,  which  are  utilized  for  checking  up  current 


300518 


vi  PREFACE 

operations  and  determining  tendencies.  They  provide  a  basis 
for  the  formulation  of  plans  and  poKcies.  If  all  of  the  details  of 
the  business  are  to  be  followed  accurately  and  if  exact  standards 
are  to  be  established  for  comparison,  such  records  are  indispen- 
sable. 

In  some  large  manufacturing  companies  an  elaborate  statistical 
system  is  maintained,  whereby  the  various  department  heads  ob- 
tain statistical  reports  for  their  own  guidance  and  summaries  of 
these  departmental  reports  are  prepared  at  regular  intervals  for 
the  chief  executive.  By  this  means  statistics  are  gathered  from 
all  comers  of  the  organization,  covering  all  of  its  activities.  These 
current  reports  are  supplemented  by  reports  on  special  tests  or 
investigations.  The  use  of  statistics  is  not  confined,  however,  to 
large  companies;  many  small  manufacturing  estabhshments  and 
numerous  retail  stores  of  ordinary  volume  of  business  utilize  sta- 
tistical records  to  advantage.  The  articles  which  are  reprinted 
in  this  book  have  been  selected  with  a  view  to  illustrating  the 
uses  of  these  various  kinds  of  statistics  and  the  methods  of  col- 
lection and  presentation  in  both  large  and  small  businesses. 

This  book  does  not  pretend  to  cover  the  entire  field  of  business 
statistics,  but  deals  chiefly  with  statistics  used  in  mercantile  and 
manufacturing  businesses.  Financial  and  foreign  trade  statistics 
have  not  been  included,  except  for  casual  references,  since  the 
articles  and  other  publications  on  those  subjects  are  usually  more 
readily  available  than  the  scattered  articles  on  mercantile  and 
manufacturing  statistics  and  the  space  limitations  of  this  volume 
do  not  permit  of  expansion.  Lack  of  space  has  also  made  it  im- 
possible to  include  more  articles  on  statistics  used  in  the  admin- 
istration of  railroads,  local  public  service  companies,  banks,  and 
insurance  companies.  Although  their  application  to  these  special- 
ized subjects  is  given  scanty  consideration  here,  the  same  funda- 
mental principles  of  statistical  theory  and  method  apply  to  these 
special  classes  of  business  statistics. 

In  presenting  statistics  to  be  used  in  business  administration, 
graphs  and  charts  can  frequently  be  used  advantageously  to  sup- 
plement tabulated  figures.  Many  persons  can  more  readily  gra^ 
the  facts  shown  by  the  statistics  when  they  are  presented  in 


PREFACE  Vll 

graphical  form.  It  must  be  recognized,  nevertheless,  that  others 
prefer  to  use  only  the  tabular  statements  and  for  them  it  is  a  waste 
of  time  to  prepare  charts.  The  applications  of  the  graphic  method 
to  the  presentation  of  business  statistics  are  manifold  and  numer- 
ous examples  are  shown  in  the  selections  reprinted  in  this  book. 
A  comprehensive  treatment  of  the  subject  of  chart  preparation 
has  not  been  included  inasmuch  as  that  subject  is  well  covered  in 
other  treatises  which  are  readily  available. 

The  editor  realizes  fully  that  this  work  represents  only  a  be- 
ginning of  the  development  of  this  subject.  He  has  been  forced, 
however,  to  utilize  such  material  as  is  available,  with  its  numerous 
shortcomings  and  deficiencies.  It  is  hoped  that  the  book  will 
serve  to  illustrate  the  magnitude  of  the  problems  involved  and 
thereby  stimulate  more  scientific  investigation  of  the  subject. 

Melvin  T.  Copeland. 

Cambridge,  Mass.,  April  6, 1916, 


CONTENTS 

CHAPTER  I 
STATISTICAL  METHODS 

PAGE 

I.  Statistical  Methods 3 

By  Melvin  T.  Copeland 

II.  Statistical  Units 29 

By  G.  P.  Watkins 

III.  Index  Numbers 52 

By  Wesley  C.  Mitcbell 

CHAPTER  II 
STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS 
I.  Statistical  Indices  of  Business  Conditions 98 

By  Melvin  T.  Copeland 

II.   Current  Theory  Concerning  Business  Cycles 132 

By  Wesley  C.  Mitchell 

III.  Government  Crop  Reports     138 

BxjREAU  OF  Crop  Estimates,  U.  S.  Department  of  Agriculture 

IV.  Current  Sources  of  Information  in  Produce  Markets    .     161 

By  Bruce  D.  Mudgett 

CHAPTER  HI 

SALES  AND  ADVERTISING  STATISTICS 

Introduction 178 

I.  Considerations  of  the  Market 186 

Jl  By  A.  W.  Shaw 

11.  Why  and   How  a  Manufacturer  Should   Make   Trade 
^Investigations 197 

^  By  C.  C.  Parlin 

in.    FlNT)ING  THE   FaCTS  THAT   CoUNT 207 

By  J.  G.  Fredericks  and  F.  M.  Feiker 

IV.  Demand  Among  Owners  of  Homes 217 

ix 


X  CONTENTS 

PAGE 

V.  Planning  Next  Year's  Business 223 

By  Melville  W.  Mix 

VI.  Sales  Development 230 

VII.  Need  of  a  Federal  Trade  Census 235 

By  Melvin  T,  Copeland 

Vni.  Report  of  Committee  on  Wiring,  National  Electric 

Light  Association 240 

IX.  Guiding  Salesmen  by  Map  and  Tack 251 

By  W.  A.  Waterbury 

X.  Determining  the  Value  of  Salesmen 254 

By  Donald  L.  Kinney 

XI.  Records  Salesmen  Like 261 

By  K.  K.  Bell 

XII.  Graphs  for  the  Sales  Manager 264 

By  Stanley  C.  Tarrant 

XIII.  Advertising  and  Sales  Department  Records 267 

By  Edward  S.  Babcox 

XIV.  The  Facts  that  Must  Govern  Advertising 272 

By  H.  Tipper 

XV.  Finding  the  Weak  Spots  in  General  Publicity    ...     276 

By  Floyd  Y.  Keeler 

XVI.  Using  Buyers  to  Find  Out  How  to  Reach  Prospects     281 

By  RoscoE  C.  Chase 

"^XVII.  How  Packard  Investigated  Quality  of  Circulation   .     285 

By  RoscoE  C.  Chase 

XVIII.   The  Worth  of  Various  Plans  to  Produce  Circulation    290 

By  George  O.  Glavis 

XIX.  Analysis  of  Newspaper  Circulation 298 

By  E.  G.  Pratt 

XX.  What  the  Advertiser  Pays  For 302 

By  Roy  W.  Johnson 

XXI.  Record  of  Advertising  Results 313 

By  Thomas  P.  Comeford 

XXII.  Testing  Copy  and  Mediums 316 

XXIII.  How  Keyed  Returns  May  Throw  Light  on  Mediums 
AND  Copy 328 

By  Grafton  B.  Perkins 

XXIV.  Cumulative  Value  and  Advertising  Record  Keeping  .     335 

By  William  A.  Shryer 

XXV.  Making  Each  Medium  Pull  Its  Share  of  the  Load    .     353 

By  John  P.  Wilder 


CONTENTS  XI 

PAGE 

XXVI.  Fallacy  of  Rating  Mediums  on  Inquiry  Basis  ...     357 

By  LxTTHER  D.  Fernald 

XXVII.  Why  Cost  Per  Inquiry  is  a  Bad  Guide 363 

By  S.  R.  McKelvie 

XXVEII.  Forecasting  Results  of  Sales  Letters 369 

By  H.  McJOHNSTON 

XXIX.  Retail  Control  through  Sales  Records 374 

By  A.  W.  Montgomery 

XXX.  Keeping  Tab  on  Sales  and  Profits 381 

By  W.  J.  MuxLiN 

XXXI.  The  Danger  Zone  in  Store  Keeping 386 

By  W.  S.  Zimmerman 

XXXII.  More  Turnovers - 390 

By  Wheeler  Sammons 


CHAPTER   IV 

FACTORY  STATISTICS 

Introduction 402 

I.  The  Purchasing  Agent 408 

By  Elihu  C.  Church 

II.  Anticipating  Buying  Emergencies    .........    411 

By  H.  A.  Russell 

in.  Checking  Losses  in  the  Storeroom 417 

By  WiLFORD  G.  Astle 

IV.  The  Perpetual  Inventory  in  Practical  Stores  Oper- 
ation     427 

By  J.  B.  Green 

V.  The  Stores  Department 439 

By  George  C.  Yeomans 

VI.  Time  Study  and  Task  Work  Explained 443 

By  Saneord  E.  Thompson 

VII.  The  Automatic  Rating  of  Workmen 452 

VIII.  Hiring  and  Firing 458 

By  Magnus  W.  Alexander 

IX.  A  Graphical  Daily  Balance  in  Manufacture.   .   .   .    474 

By  H.  L.  Gantt 

X.  Use  of  Production  Charts  in  a  Machine  Shop  .  .   .    484 

By  E.  H.  ScHELL 

XL  Aids  to  Scientific  Foundry  Management 488 

By  W.  M.  Corse 


BUSINESS  STATISTICS 

CHAPTER  I 

STATISTICAL  METHODS 
I.  Statistical  Methods 

By  Melvin  T.  Copeland 

It  is  the  purpose  of  this  chapter  to  explain  the  fundamental  prin- 
ciples of  statistical  theory  and  method  which  should  be  observed 
in  the  collection,  classification,  and  presentation  of  statistics  to  be 
utilized  in  business  administration.  Although  only  a  means  to  an 
end,  reliable  statistics  furnish  one  of  the  essential  bases  for  the 
formulation  of  administrative  policies.  The  solution  of  many  a 
managerial  problem  in  a  business  establishment  is  found  by  a 
study  of  the  statistical  records  of  past  experience  and  present 
operations.  The  statistics,  to  be  sure,  seldoln  fumish  all  of  the 
necessary  information  for  the  solution  of  a  problem  or  the  deter- 
mmation  of  a  poKcy,  but  they  generally  provide  a  more  definite 
knowledi^e  of  pertinent  facts  than  can  otherwise  be  obtained. 
Stiitisiical  records  and  reports  help  to  eliminate  guess  work  and 
obviate  the  necessity  of  placing  reliance  upon  impressions  or  recol- 
lec  tions  which  may  be  partial  or  faulty.  In  collecting,  classifying, 
^r  -lariring,  and  presenting  these  statistics,  which  are  so  useful 
vv  .<  ^>roperly  prepared,  it  is  necessary  to  adhere  closely  to  sound 
p;  inciples  of  statistical  theory  and  method. 

Statistics  may  be  defined  as  numerical  statements  of  facts  by 
means  of  which  large  aggregates  are  analyzed,  the  relations  of  in- 
di  vidual  anits  to  their  groups  are  ascertained,  comparisons  are 
made  between  groups,  and  continuous  records  are  maintained  for 
comparatve  purposes.  From  this  definition  it  is  to  be  noted  that 
stitistics  represent /ac/5,  expressed  numerically.  Secondly,  sta- 
tis.tics  deal  with  aggregates  or  masses  which  are  sufficiently  large 
to  reveal  types  or  standards,  even  if  individual  units  show  wide 


4  BUSINESS  STATISTICS 

variations.  This  tendency  for  large  aggregates  or  groups  to  con- 
form to  definite  types  or  standards  or  to  show  general  or  underly- 
ing tendencies  is  what  is  meant  by  the  "  law  of  averages,"  a  term 
with  which  many  business  men  are  familiar.  Statistics,  finally, 
are  used  chiefly  for  purposes  of  comparison.  Individual  units  or 
classes  are  compared  with  the  entire  group  of  which  they  are  a 
part;  different  groups  are  compared;  and  comparisons  are  made 
for  a  single  group  at  different  periods  of  time  in  order  to  reveal 
tendencies. 

One  of  the  chief  sources  of  statistical  data  in  a  factory,  for  ex- 
ample, is  the  cards  or  forms  upon  which  the  performance  of  each 
workman  is  recorded.    These  cards  may  serve  primarily  for  mak 
ing  out  the  payroll,  a  purpose  for  which  each  is  used  individual! , 
If  that  is  the  only  use  which  is  made  of  the  data  on  the  cards,  they 
are  not  to  be  considered  as  statistics.   The  data  on  the  cards  serve 
a  statistical  purpose  only  when  the  records  for  each  group  of  work- 
men are  combined  or  a  comparative  record  is  compiled  in  such 
form  that  exact  comparisons  can  be  made.    Similarly  in  a  depart- 
ment store,  in  order ^to  provide  a  check  on  errors,  a  record  may  be 
kept  of  each  package  delivered,  but  if  the  total  number  delivered 
is  not  computed  periodically,  the  store  has  no  delivery  statistic 
It  is  the  use  of  such  reports  and  memoranda  for  stjitist^'dj 
purposes  with  which  we  are  concerned  in  this  book;  the  (  tLer 
purposes  for  which  the  original  data  may  be  used  need  not  h 
discussed  here.    This  chapter  is  concerned  with  the  piinciples 
involved  in  the  collection,  classification,  and  presentation  of 
business  statistics,  both  external  and  internal. 

The  planning  of  a  schedule  of  questions  or  a  system  of  repi  i  i 
by  means  of  which  statistics  are  to  be  collected,  is  the  first  top -v- 
to  be  considered  and  it  is  one  of  great  importance.  The  value  of 
any  statistics  depends  to  a  large  degree  upon  the  accuracy  wi(Ji 
which  the  original  data  are  collected.  Conclusions  dra-vsm  [vera 
the  statistics  cannot  be  reliable  if  there  are  inaccuracies  in  the 
original  data.  In  order  that  errors  may  be  prevented,  each  que 
tion  on  a  schedule  should  be  stated  so  simply  and  so  directly  that 
indefinite  or  ambiguous  answers  are  impossible.  Thus  a  qu(.^sti(>'> 
which  asks  "  To  what  extent "  seldom  yields  usable  answe 


6  BUSINESS  STATISTICS 

As  another  example,  the  following  specimen  schedule  used  by 
the  Massachusetts  Bureau  of  Statistics  in  a  special  inquiry  is  re- 
produced. The  italicized  entries  represent  answers  from  a  typi- 
cal factory. 

RATES  OF  WAGES,  EARNINGS,  AND  HOURS  OF  LABOR 

1.  Industry,  Paper  and  Wood  Pulp. 

2.  Specific  Product,  Writing  —  linen,  bond,  and  ledger. 

3.  Number  of  employees  when  running  full  time  during  week  ending 1912. 

Minors  —  Under  16 
Men        Women  Boys  Girb         Totab 

(a)    Dayworkers 63  19  . .  . .  82 

{h)    Shiftworkers 80  ..  ..  ..  80 

(c)    Pieceworkers 15  •  •  •  •  ^5 

Totals 143  34  ..  ••  177 

4.  Working  hours  of  dayworkers.    Total  hours  a  week,  males,  55;  females,  54. 

(a)   Full  days,  7  a.m.  to  6  p.m.,  60  minutes  for  lunch. 

(6)  Saturdays,  7  a.m.  to  121s..,  o  minutes  for  lunch. 
4a.  Workmg  hours  of  shiftworkers.  Total  hours  mill  is  in  operation,  144.  Total 
hours  closed,  24.  Total  hours  per  week,  168.  First  shift  begins  7  a.m.,  ends 
3  p.m.;  second  shift  begins  3  p.m.,  ends  11  p.m.;  third  shift  begins  Ji  p.m.,  ends 
7  A.M.  Number  of  hours  a  week  shiftworkers  are  relieved  from  work  for  meals, 
None. 

5.  Wages  and  hours  of  time  workers  for  week  ending  October  5,  191 2;  of  piece- 
workers for  weeks  ending  September  28,  October  5,  and  October  12,  191 2. 


Time- 
work- 
ers (T). 
Shift- 
work- 
ers (S), 

or 
Piece- 
work- 
ers (P) 

Number  of  Employees 

FuU  Time 

Actual 

Time  Made 

and 

Department 

and 
Occupation 

Men 

Wo- 
men 

Minors 

Days 
wiek 

Hours 

Earnings 

in  Week 

Oct.  5,  1912 

Rate  of 
Pay  per  1 

Boys 

Girls 

Day 

Week 

Hours 
Worked 

Earn- 
ings 

Machine  tender 
Machine  tender 
Machine  tender 
Size  maker 

Rag  sorter 

s 
s 
s 

T 
P 

I 
I 
I 
I 

I 

•• 

•• 

6 
6 
6 

6 
6 

8 

8 

8 

10 

9 

1 
48 

48 
55 

54 

48 
40 
56 

55 

[36 
{27 
[45 

$28.00 
23.20 

29-75 
10.50 

5-25 
3-40 
5-50 

58\c.  hr. 
58y.hr. 
53-ic.hr. 
19  c.hr. 

Piece 

1  Insert  here  the  unit  of  pa}rment. 


STATISTICAL  METHODS  7 

The  following  form  ^  is  used  by  the  Boston  Placement  Bureau 
for  obtaining  information  regarding  employers  with  whom  the 
Bureau  may  secure  suitable  positions  for  young  people  just  enter- 
ing commercial  and  industrial  life  from  the  public  schools  of 
Boston.  The  Bureau  aims  "  to  bring  the  right  worker  and  work 
together  by  seeking  to  know  as  much  as  possible  about  the 
requirements  of  both."  This  "  Firm  Schedule  "  is  an  excellent 
example  of  a  form  which  is  carefully  planned  to  record  a  maximum 
amoimt  of  definite  information  with  economy  of  space. 


NAME  OF  FIRI 

Address 

Employment  Mai. 

VI.... 

Industry 

Product 

laorer      

Kinds  of  Work 

No. 

Sex 

Age 

Weekly  Wages 

Time- 
work 

Piece- 
work 

Position 

Begin 

Rate  Inc. 

Max. 

Sit 

Stand 

Dangers 

Employees:  No.  over  21:  Men Women Under  21:  Boys Girls Total 

Workers  Desired:  Minimum  Age Schooling Other  Qualifications 

Immigrants. . .  Negroes. . .  Paroled  Boys  and  Girls Physically  Handicapped Probationers. . . . 

Seasons:   Rush Maximiun  Force Dull Minimum  Force 

Hours:  Begin a.m.    End p.m.    Saturday p.m.    Noon Variation 

Physical  Conditions:  Type  Building Light Ventilation 

Space Cleanliness Lunch  Facilities 

Fire  Protection Rest  Room 

Opportunities  for  Advancement 

Co-operation  with  Placement  Bureau 

Present  Wants • 

Date Reported  by 

Form  3.    Firm  Schedule.    Placement  Bureau. 


Manufacturers  and  wholesalers  who  employ  traveling  salesmen 
can  utilize  the  salesmen  to  collect  valuable  information,  at  least 
partially  statistical  in  nature,  concerning  business  conditions  in 
the  districts  which  the  salesmen  visit.  One  company,  which  has 
frequently  used  its  large  salesforce  for  this  purpose,  sent  out  the 
following  questionnaire  to  its  salesmen  in  19 10: 

*  Reproduced  by  permission.    The  size  of  theoriginal  card  is  5x8  inches. 


8  BUSINESS  STATISTICS 

I.   Are  automobiles  being  bought  freely  in  your  territory  ? 


2.  Are  they  being  bought  for  cash  ? ;  or  on  credit  ? 

3.  Are  purchasers  mortgaging  land  or  homes  to  buy  auto- 
mobiles ? ;  to  what  extent  ? 

4.  Are  purchasers  withdrawing  money  from  banks  ? 

5.  When  not  cash,  are  terms  partly  cash  and  partly  credit  ? 
;  how  long  credit  ? 

6.  What  class  of  men  constitute  the  largest  class  of  pur- 
chasers ? 

7.  What  is  the  attitude  of  bankers  and  financial  men  toward 
the  whole  question  ? 

8.  Do  they  anticipate  any  serious  difficulty  or  financial  hap- 
pening because  of  extensive  purchases  of  automobiles  ? 


9.  Are  automobiles  being  used  for  purposes  other  than  pleas- 
ure ? 

10.  How  have  automobile  purchases  affected  the  retail  hard- 
ware trade  ? ;  the  lines  carried  ? 

11.  Do  purchasers  of  automobiles  settle  their  accounts  with 
retail  hardware  dealers  as  promptly  as  heretofore  ? 

12.  How  has  the  purchase  of  automobiles  affected  good 
roads  sentiment,  especially  amongst  farmers  ? 

The  replies  to  these  questions  were  summarized  and  they  gave 
the  company  more  definite  knowledge  concerning  the  conditions 
in  individual  localities  and  also  concerning  general  tendencies 
than  could  be  obtained  elsewhere.  The  conclusions  which  were 
drawn  from  the  summary  of  the  replies  have  proved  to  be  correct. 
The  possibilities  of  this  method  of  obtaining  information  of  high 
value  have  been  appreciated  by  only  a  few  of  the  companies  which 
are  in  a  position  to  avail  themselves  of  it.  In  drawing  up  a  ques- 
tionnaire for  such  a  purpose  as  this  the  general  rules  which  have 
been  stated  should  be  observed. 

The  following  questions  from  the  Schedule  for  Retail  Grocers 
used  by  the  Harvard  Bureau  of  Business  Research  in  its  study  of 
the  retail  grocery  trade  illustrate  a  form  of  specific  question  for 
the  collection  of  information  partially  statistical  in  character. 


STATISTICAL  METHODS  9 

Instead  of  asking :  "  Do  you  employ  any  system  of  stock  records  ? 

What  does  this  system  show  ? /'  the  question 

is: 

"  Do  you  employ  any  system  of  stock  records  ? Does 

it  show  for  each  line  and  brand  —  the  quantity  received  ? 

..,. ;    quantity  on  hand  ? ;    quantity 

sold  ? ;  quantity  ordered  ? ;  quantity  to 

buy  ? ;    source  of  supply  ? ;    dates  to 

buy  ? ;  percentage  of  profit  ? ;  or  any 

other  information  ? Is  this  informa- 
tion obtained  from  sales  slips  ? ;  or  how  ? 

For  what  period  is  the  record  kept  ? What 

is  your  method  of  following  the  movement  of  new  brands, 

slow  movers,  and  specialties  ? " 

The  other  questions  upon  the  schedule  are  similarly  specific. 

So  far  we  have  been  considering  chiefly  the  collection  of  exter- 
nal statistics.  Somewhat  different  conditions  are  found  when  the 
collection  of  internal  statistics  within  a  single  business  establish- 
ment is  undertaken.  Internal  statistics  are  kept  largely  in  the 
form  of  continuous  records  made  up  from  reports  received  at  regu- 
lar intervals.^  Individual  employees  or  officers  are  made  person- 
ally responsible  for  the  accuracy  and  punctuality  of  the  reports. 
This  tends  to  prevent  errors,  but  does  not  eliminate  them  en- 
tirely; the  forms  used  may  be  imperfectly  understood  by  the  per- 
son who  is  expected  to  fill  them  out.  As  in  a  schedule  or  form  for 
the  collection  of  external  statistics,  each  item  called  for  on  these 
internal  reports  should  be  indicated  definitely  and  specifically  in 
simple  terms.  Any  term  which  is  ambiguous  or  possible  of  more 
than  one  interpretation  should  be  avoided. 

These  internal  records  not  only  serve  as  a  means  of  recording 
data  for  tabulation  but  also  are  used  for  reference  purposes.  The 
exact  fonn  which  is  chosen,  therefore,  must  meet  both  these 
needs.  In  planning  a  set  of  records  the  primary  basis  of  classifi- 
cation must  be  determined  first,  since  the  records  will  be  filed 
upon  that  basis.    Take  the  purchasing  department  of  a  factory 

^  Some  forms  for  sales,  advertising,  and  factory  records  are  given  in  the  later 
sections  of  this  book. 


10 


BUSINESS  STATISTICS 


for  example.  A  tabular  record  is  to  be  kept  of  the  orders  of  each 
material  purchased.  Two  bases  of  classification  are  possible,  — 
(i)  according  to  materials,  or  (2)  according  to  sources  from  which 
purchased.  If  the  former  basis  is  used,  a  card  will  be  made  out 
for  each  material  and  all  orders  of  each  material  will  be  entered  on 
a  single  card.  If  the  second  basis  is  chosen,  a  card  will  be  made 
out  for  each  source  of  supply  from  which  purchases  are  made  and 
all  purchases  from  one  source,  whether  or  not  several  different 
materials  are  included,  will  be  entered  on  one  card.  This  latter 
method  will  show  the  total  purchases  from  each  source  but  not 
the  total  purchases  of  each  material  without  retabulation.  Inas- 
much as  the  statistics  for  the  total  purchases  of  each  material  are 
generally  of  greater  significance  than  the  statistics  for  the  total 
purchases  from  each  source,  the  classification  according  to  ma- 
terials is  preferred.  The  form  of  card  drawn  up  for  this  purpose 
is  shown  below.  The  totals  derived  periodically  from  column 
four  provide  statistics  of  the  rate  of  purchase  for  the  guidance  of 
the  purchasing  agent. 


Material                                          ^ 

Date 
Ordered 

Date 
Re- 
ceived 

Source 

Quantity 

Terms 

Billed 
Cost 

Net 
Cost 

Net 

Cost  per 

Unit 

Claims  and 
Allowances 

Total  quantity                              Period 

Form  for  purchase  records 


In  such  a  case  as  the  above,  an  attempt  is  sometimes  made  to 
use  a  composite  record  which  will  give  on  a  single  card  totals  for 
materials  and  totals  for  sources.    This  is  generally  impracticable, 


STATISTICAL  METHODS  II 

however,  since  the  record  then  becomes  cumbersome.  It  is  sim- 
pler to  make  out  two  sets  of  cards  if  both  of  these  totals  are  re- 
quired. Memoranda  regarding  sources,  shipping  instructions, 
and  similar  items  should  be  entered  on  the  back  of  the  card  or  in 
some  other  place  rather  than  in  the  columns  on  the  face  of  the 
card.  These  columns  should  be  used  only  for  entries  of  facts 
which  are  peculiar  to  the  individual  order  and  which  are  subject 
to  frequent  change.    These  rules  are  of  general  applicability. 

In  planning  a  statistical  investigation  or  a  system  of  records, 
one  of  the  chief  problems  is  the  selection  and  definition  of  units. 
The  differences  in  the  worth  of  various  types  of  units  are  explained 
at  length  in  the  article  by  Mr.  Watkins  reprinted  in  this  volume; 
hence,  it  is  unnecessary  to  go  into  the  subject  at  length  here.  A 
few  examples  will  suffice. 

Units  in  common  use  frequently  have  several  meanings.  A 
"  case  '^  of  shoes  has  no  standardized  definition  which  is  univer- 
sally accepted.  A  "  ton  "  has  numerous  meanings,  —  the  long 
ton,  the  short  ton,  the  metric  ton,  and  also  the  various  defini- 
tions given  the  term  in  measuring  ships.  Again,  a  unit  which  is 
sufficiently  definite  for  some  purposes  may  be  inadequate  for 
others.  In  retail  shoe  stores  in  large  cities,  for  example,  in  ad- 
dition to  the  regular  salesforce,  extra  salesmen  frequently  are  em- 
ployed two  or  three  evenings  each  week.  An  inquiry  which 
showed  the  total  number  of  clerks  employed  in  these  stores,  in- 
cluding extras,  would  suffice  if  it  were  desired  merely  to  learn  the 
total  number  of  persons  gaining  all  or  part  of  their  livelihood 
from  the  retail  shoe  business.  But  if  the  object  of  the  inquiry  is  to 
establish  standards  of  performance,  such  as  the  average  sales  per 
salesperson,  allowance  must  be  made  for  the  fact  that  the  extra 
salespersons  work  only  part  of  the  time  that  the  stores  are  open; 
the  extra  salesmen  must  be  counted  as  fractional  parts  of  regular 
salesmen  or  the  records  for  all  salespersons,  both  extras  and  regu- 
lars, expressed  in  terms  of  "  clerk-hours."  In  factories  and  offices 
the  "  machine-hour "  and  the  "  man-hour  "  are  often  used  as 
units  for  statistical  purposes.  Where  such  units  are  desired,  pro- 
vision must  be  made  for  obtaining  the  necessary  data  on  the 
reports. 


12  BUSINESS  STATISTICS 

Because  of  the  difficulties  of  definition,  certain  statistics  which 
are  collected  and  published  in  the  United  States  Census  of  Manu- 
factures are  worthless  or  must  be  used  with  extreme  caution. 
In  the  statistics  for  the  total  value  of  products  for  the  various  in- 
dustries there  is  frequently  serious  duplication,  due  to  the  fact 
that  the  total  for  an  industry  may  include  figures  from  plants 
which  manufacture  intermediate  products  for  sale  as  well  as  fig- 
ures from  plants  which  manufacture  only  fully  finished  goods. 
The  intermediate  products  are  sold  as  materials  to  plants  man- 
ufacturing finished  goods.  If  the  intermediate  products  are 
produced  in  a  plant,  however,  in  which  the  final  stages  of  the 
manufacturing  processes  of  the  industry  are  also  carried  on,  their 
value  is  not  separately  reported.  Hence  the  greater  the  speciali- 
zation of  process  in  independent  plants,  the  greater  the  separa- 
tion of  the  successive  stages  of  manufacturing,  the  greater  is  the 
value  of  products  reported  for  the  industry  and  the  greater  the 
duplication.  If  there  is  a  strong  tendency  toward  integration  of 
an  industry,  on  the  contrary,  the  duplication  of  returns  is  thereby 
lessened.  In  making  comparisons  of  the  value  of  products  of 
different  industries  or  for  a  single  industry  at  different  censuses, 
this  tendency  toward  specialization  or  integration  of  processes 
must, be  taken  into  account. 

As  an  example  of  this  duplication,  if  a  company  manufactures 
pig  iron  for  sale,  the  value  of  the  pig  iron  sold  is  included  in  the 
value  of  product  of  iron  and  steel  manufactures.  Another  com- 
pany, however,  which  produces  pig  iron,  converts  this  pig  iron 
into  steel,  and  rolls  the  steel  into  rails  or  other  finished  products, 
does  not  report  the  value  of  its  pig  iron  production  but  only  the 
value  of  the  rails  and  other  finished  products.  In  the  worsted  in- 
dustry, to  give  another  example,  as  the  practice  of  producing  tops 
for  sale  increases,  the  reported  value  of  the  total  product  is 
increased  even  if  no  more  cloth  is  produced. 

The  statistics  of  capital  are  probably  the  most  nearly  worthless 
of  any  in  the  Census.  The  Census  Bureau  itself  condemns  the  sta- 
tistics for  capital,  which  by  the  Congressional  Census  Act  it  has 
been  required  to  collect.  "  In  the  inquiry  concerning  capital, 
comparisons  have  no  real  statistical  value  prior  to  the  Census  of 


STATISTICAL  METHODS  1 3 

1890.  The  form  of  the  inquiry  regarding  capital,  in  all  censuses 
down  to  and  including  1880,  was  so  vague  and  general  in  its  char- 
acter that  it  cannot  be  assumed  that  any  true  proportion  exists 
between  the  statistics  on  this  subject,  as  elicited  prior  to  1890. 
At  the  Census  of  1880,  the  question  read:    ^  Capital  (real  and 

personal  invested  in  the  business)  $ '     At  the  Census  of 

1890,  live  capital,  i.  e.,  cash  on  hand,  bills  receivable,  unsettled 
ledger  accounts,  raw  materials,  stock  in  the  process  of  manufac- 
ture, finished  product  on  hand,  and  other  sundries,  was  for  the 
first  time  included  as  a  separate  distinct  item  of  capital.'^  ^  Again 
it  is  stated:  ^  '*  The  attempt  to  measure  capital  absolutely  and 
accurately  has  never  yet  been  successful  in  a  Census  in  the  United 
States  or  elsewhere,"  and  the  statement  made  by  General  Walker 
in  the  Ninth  Census  report  is  quoted  approvingly:  "The  Census 
returns  of  capital  invested  in  manufactures  are  entirely  untrust- 
worthy and  delusive ....  The  results  are  and  must  remain 
wholly  worthless."  In  the  Census  of  1910  it  is  stated:  ^  "  For 
reasons  stated  in  reports  of  prior  censuses  the  statistics  of  capital 
secured  by  the  census  canvass  are  so  defective  as  to  be  of  little 
value,  except  as  indicating  very  general  conditions."  As  a  matter 
of  fact,  they  are  not  useful  for  that  purpose,  since  the  same 
general  conclusions  can  be  drawn  more  safely  from  other  Census 
statistics. 

The  difl&culties  in  defining  capital  satisfactorily  for  Census  pur- 
poses have  been  insuperable  heretofore  and  will  remain  so  until 
accounting  methods  in  manufacturing  plants  have  been  stand- 
ardized. The  value  of  the  land  may  be  dependent  upon  its  use 
as  a  factory  site.  The  value  of  rented  property  may  be  included, 
but  if  so  upon  what  basis  is  it  to  be  capitalized  ?  Some  companies 
have  charged  off  no  depreciation  but  carry  machinery  and  other 
plant  equipment  on  their  books  at  original  cost.  Others  have 
written  off  so  much  that  the  book  values  of  their  plants  are  only 
nominal.  So  long  as  there  are  such  variations  in  the  practice  of 
accounting  for  depreciation,  how  can  statistics  for  capital,  which 

*  Twelfth  U.  S.  Census,  vol.  vii,  p.  Ixi. 

2  Ibid.,  p.  xcvii. 

'  Thirteenth  U.  S.  Census,  Abstract,  p.  437. 


14  BUSINESS  STATISTICS 

are  based  upon  book  value,  be  accepted  as  reliable  ?  Are  outside 
investments,  in  other  manufacturing  or  financial  enterprises,  to. 
be  included  ?  Are  good  will,  patents,  and  trade-marks  to  be 
capitalized  ?  Finally,  is  credit  to  be  taken  into  account  as  has 
been  done  since  1890,  by  having  unpaid  accounts  which  are  due 
returned  as  capital  ?  The  obstacles  to  securing  reliable  capital 
statistics  are  insuperable  with  the  prevailing  diversity  of  account- 
ing methods.  For  the  same  reason  the  Census  statistics  for  costs 
and  expenses  are  now  of  little  value.  A  standardization  of 
accounting  methods,  which  is  also  desirable  for  purely  business 
reasons,  would  go  far  toward  making  the  Census  of  Manufactures 
not  merely  an  interesting  record  of  progress  but  of  practical 
value  to  business  men. 

In  obtaining  comparable  financial  statistics,  uniform  account- 
ing systems  are  essential.  The  statistics  for  American  railroad 
earnings  and  expense  have  become  far  more  useful  since  the  In- 
terstate Commerce  Commission  prescribed  standardized  accoimt- 
ing  methods.  Reliable  comparisons  can  now  be  made  between 
the  figures  for  different  roads. ^  Several  trade  associations  have 
prepared  uniform  accounting  systems  but  they  have  done  little, 
as  yet,  toward  collecting  statistics  and  working  out  trade  stand- 
ards for  comparison  upon  these  uniform  bases. 

When  the  Harvard  Bureau  of  Business  Research  undertook  to 
secure  detailed  figures  for  operating  expenses  in  retail  shoe  stores, 
it  found  that  it  was  necessary  to  have  a  uniform  system  of 
accoimting.  Not  only  were  there  nmnerous  retailers  who  were 
keeping  practically  no  accounts,  but  the  definitions  of  the  several 
items  of  profit  and  expense  were  as  varied  as  the  niunber  of  stores. 
There  were  hardly  two  retailers,  for  example,  who  included  the 
same  items  in  selling  expense.  The  Harvard  System  of  Accounts 
for  Shoe  Retailers  was  therefore  drawn  up  and  when  the  study  of 
the  retail  grocery  trade  was  commenced  a  similar  system  for  retail 
grocers  was  prepared.  These  accounting  systems  give  an  exact 
meaning  to  each  account  and  make  it  possible  to  obtain  compar- 
able statistics  to  be  used  in  establishing  trade  standards. 

1  For  a  discussion  of  railroad  accounting  methods,  see  A.M.  Sakolski,  American 
Railroad  Economics,  pp.  169-264. 


STATISTICAL  METHODS  1 5 

In  a  statistical  investigation  the  actual  collection  of  data, 
for  which  the  blank  forms  have  been  prepared  and  the  terms 
defined,  is  carried  out  either  by  personal  agents  or  by  mail.  If 
the  purpose  is  to  make  a  complete  enumeration  of  the  group 
imder  investigation,  the  data  must  ordinarily  be  collected  by 
personal  agents.  If,  on  the  other  hand,  only  a  sample  is  to  be 
taken,  it  may  be  possible  to  collect  the  information  by  mail. 
In  sampling,  or  testing,  the  object  is  to  secure  returns  from  a 
sufficiently  large  proportion  of  the  group  to  warrant  drawing 
conclusions  for  the  entire  group.  The  results  do  not  purport  to 
be  complete  but  only  representative,  and  the  failure  to  secure 
replies  from  all  to  whom  the  inquiry  is  addressed  does  not 
necessarily  vitiate  the  results. 

The  United  States  Census  is  a  complete  enumeration  of  the 
population  of  the  country  and  complete  statistics  are  obtained  for 
most  of  the  other  subjects  included.  This  enumeration  is  made 
by  means  of  agents  and  the  results  would  be  fully  accurate  if  the 
agents  secured  absolutely  complete  returns.  There  is,  however, 
some  degree  of  error  in  all  the  Census  statistics.  In  taking  the 
Census  the  enumerator  is  the  weakest  point.  The  Census  Bureau 
must  employ  a  large  mmiber  of  persons  who  have  had  no  previ- 
ous statistical  training  and,  despite  careful  preparation  of  sched- 
ules and  instructions,  it  is  impossible  to  prevent  occasional 
errors  and  omissions.  The  percentage  of  error,  however,  in  most 
instances  is  negligible. 

The  sampling  method  is  used  by  private  investigators  when  it 
is  impossible  or  impracticable  to  secure  full  statistics  for  the  entire 
group  with  which  the  inquiry  is  concerned.  If  the  conclusions 
drawn  from  the  sample  are  to  be  reHable  it  is  essential  that  the 
sample  be  fully  typical.  Hence  in  planning  the  investigation, 
care  must  be  taken  to  secure  returns  thoroughly  representative  of 
the  whole  group. 

An  example  of  the  sampling  method  is  furnished  by  the  circu- 
lation test  made  by  the  Literary  Digest  in  191 2.  This  magazine 
at  that  time  had  a  circulation  of  265,000.  The  publishers  wished 
to  ascertain  the  interest  of  the  subscribers  in  automobiles  in  order 
to  show  the  probable  value  of  the  magazine  as  a  medium  for  auto- 


1 6  BUSINESS  STATISTICS 

mobile  advertising.  Since  it  was  impracticable  to  send  an  inquiry 
to  every  subscriber,  letters  were  sent  to  11,439  subscribers  in  six- 
teen cities  and  towns  in  various  parts  of  the  United  States.  Each 
letter  asked  the  following  questions:  "  Do  you  own  an  automo- 
bile ?  "  "  What  is  its  make  ?  "  ''  What  is  your  vocation  ?  " 
Replies  were  obtained  from  seventy  per  cent  of  the  persons  to 
whom  these  letters  were  sent  and  upon  the  basis  of  these  replies 
ratios  were  worked  out  for  the  entire  subscription  list.  Of  those 
who  replied,, 30.5  per  cent  were  owners  of  automobiles.  Hence  it 
was  concluded  that  30.5  per  cent  of  the  total  number  of  sub- 
scribers were  automobile  owners.  This  conclusion  may  be  ac- 
cepted as  accurate  if  the  same  proportions  held  for  subscribers 
who  did  not  reply,  if  these  sixteen  cities  and  towns  typically 
represented  the  geographical  and  urban  distribution  of  the  sub- 
scribers who  were  not  circularized. 

A  time  study  in  a  factory  is  another  example  of  a  statistical 
test.  By  means  of  a  stop  watch  a  series  of  observations  are  made 
of  the  time  required  by  an  operative  to  perform  a  certain  task. 
From  these  observations  standards  are  worked  out  for  future 
guidance.  In  making  such  a  test  it  is  essential  that  the  conditions 
be  normal  and  that  a  sufficient  niunber  of  observations  be  taken. 

The  number  of  observations,  or  the  number  of  replies  to  an  in- 
quiry, which  will  provide  a  representative  sample,  cannot  be  pre- 
scribed arbitrarily.  It  depends  upon  the  range  of  variation  which 
is  shown  —  the  greater  the  variation  the  larger  the  number  re- 
quired. This  sampling  may  be  likened  to  the  testing  of  materials 
or  product  in  a  manufacturing  plant,  where  the  frequency  of  the 
tests  is  regulated  according  to  the  degree  of  variation  shown.  The 
probability  of  error  diminishes  as  the  number  of  items  used  for 
the  sample  increases;  the  greater  the  number  of  items,  the  more 
closely  the  results  approximate  those  that  would  be  shown  by 
complete  statistics  for  the  whole  group  from  which  the  sample  is 
taken.^ 

In  some  investigations  it  is  necessary  to  accept  intelligent  esti- 
mates in  the  place  of  exact  figures.   This  is  well  exemplified  by  the 

*  A  mathematical  discussion  of  the  application  of  the  law  of  error  to  samples 
is  given  by  A.  L.  Bowley,  Elements  of  Statistics,  3d  ed.,  pp.  308-315. 


STATISTICAL  METHODS  1 7 

crop  reports  issued  by  the  United  States  Department  of  Agricul- 
ture, the  preparation  of  which  is  explained  in  a  later  article. ^  If 
the  estimates  are  made  independently,  without  bias,  by  a  suffi- 
ciently large  number  of  persons,  they  will  be  serviceable,  since 
the  errors  in  individual  estimates  will  tend  to  compensate  each 
other.  If,  on  the  other  hand,  there  is  a  common  bias  among  a 
large  proportion  of  the  estimators,  the  errors  will  be  cumulative. 
It  is  highly  important  in  considering  the  probable  degree  of  error 
in  any  statistics  to  determine  whether  the  errors  tend  to  be  com- 
pensating or  to  be  cumulative;  if  they  tend  to  be  ctunulative,  the 
statistics  have  less  value  than  if  they  tend  to  be  compensating. 

Attention  should  be  called  to  another  sort  of  estimate  which 
has  no  statistical  standing  —  an  assumption  or  guess  which, 
though  used  as  the  basis  for  more  or  less  elaborate  calculations, 
is  largely  hypothetical  and  not  warranted  by  the  experience  of 
the  person  making  it.  This  pseudo-statistical  method  is  unfortu- 
nately met  only  too  commonly.  The  possibility  of  error  is  great. 
For  example,  one  writer,  in  estimating  the  energy  used  in  the  vari- 
ous countries  of  the  world,  has  said:  "  Whenever  it  is  impossible 
to  ascertain  the  number  or  force  of  locomotives  in  any  country, 
a  safe  estimate  will  be  80  horse-power  for  every  lineal  mile  of 
railway,  or  else  one  horse-power  steam  to  every  mile  run  in  the 
year  by  the  locomotives."  Again  the  same  writer  says:  "  It 
now  seems  to  be  admitted  that  cows  give  350  gallons  of  milk 
yearly,  and  that  6,000  gallons  make  a  ton  of  butter  or  2,200  a  ton 
of  cheese."  From  such  loose  guesses  pretentious  totals  are  com- 
piled and  elaborate  comparisons  are  made.  These  counterfeit 
statistics  then  circulate  widely  at  their  face  value.  Similarly  un- 
rehable  estimates  are  encountered  almost  daily  and  tend  to  bring 
all  statistical  work  into  disrepute.  The  use  of  figures  that  have 
no  established  basis  in  fact  often  has  a  pernicious  influence,  and 
if  estimates  must  be  utilized,  they  should  be  labeled  so  conspicu- 
ously as  to  prevent  their  misuse. 

When  statistics  are  compiled  from  secondary  sources,  the 
methods  used  by  the  original  collector  should  be  examined  and 
his  definitions  studied.    Many  statistics  are  worth  far  less  than 

1  See  pp.  138-16 1. 


1 8  BUSINESS  STATISTICS 

their  face  value  because  of  faulty  methods  of  collection.  For 
secondary  statistics  an  exact  reference  should  always  be  given  to 
indicate  their  source. 

The  tabulation  of  the  information,  after  it  has  been  collected, 
should  be  carried  out  in  such  a  way  as  to  answer  definitely  and 
clearly  the  purposes  for  which  the  investigation  was  undertaken. 
The  exact  arrangement  of  the  tables  will  depend  in  each  case  upon 
what  totals  it  is  desired  to  show  and  upon  what  comparisons  it  is 
desired  to  make.  Each  column  should  be  given  an  exact  title 
that  does  not  permit  of  misinterpretation  and  the  columns  should 
be  arranged  so  as  to  bring  into  juxtaposition  those  that  are  to 
be  compared.^ 

In  classifying  data  for  tabulation,  the  chief  care  must  be  to 
arrange  the  material  in  such  a  way  that  its  full  significance  will  be 
apparent  and  that  no  confusion  can  arise.  The  limits  to  each  of 
the  classes  in  which  the  data  are  arranged  should  be  so  distinct 
that  there  will  be  no  doubt  as  to  where  each  figure  belongs.  In 
making  up  wage  tables,  for  example,  confusion  may  arise  if  the 
classes  are  specified  as  $9  to  $10,  $10  to  $11,  and  $11  to  $12.  A 
proper  arrangement  is:  $9.01  to  $10,  $10.01  to  $11,  and  $11.01  to 
$12,  or  a  similarly  definite  demarcation  that  avoids  overlapping. 

If  comparisons  are  to  be  made  between  several  groups,  the 
groups,  as  a  general  rule,  should  cover  equal  ranges.  False  im- 
pressions may  be  gained  if  one  class,  for  example,  includes  $9.01 
to  $10,  another  $14.01  to  $16,  and  a  third  $18.01  to  $21 :  in  the 
first  class  the  range  is  one  dollar,  in  the  second  two  dollars,  and  in 
the  third  three  dollars.  If  the  distribution  of  the  entire  series 
were  even,  the  third  group  would  include  three  times  as  many 
items  as  the  first  group,  but  this  fact  is  likely  to  be  overlooked,  at 
least  by  the  casual  reader.  In  each  case  the  range  chosen  for  the 
classes  must  be  determined  according  to  the  nature  of  the  statis- 
tics and  the  purposes  for  which  they  are  collected,  but  with  defi- 
nite classes  that  are  equal  in  range. 

1  For  a  more  detailed  discussion  of  "  tabulation,"  see  A.  L.  Bowley,  Elements  of 
Statistics,  3d  ed.,  pp.  73-103;  also  G.  P.  Watkins,  "  Theory  of  Statistical  Tabula- 
tion," Quarterly  Publications  of  the  American  Statistical  Association,  December, 
I9i5>  PP-  742-757- 


STATISTICAL  METHODS  1 9 

Statistics  are  used  primarily  to  make  comparisons.  These  com- 
parisons may  be  between  classes  in  a  group,  between  individual 
units  and  a  whole  group,  between  figures  for  the  same  group  at 
different  periods  of  time,  or  between  two  or  more  groups.  In 
order  that  comparisons  can  be  made,  it  is  desirable  to  have  for 
each  group  some  summary  figure  or  figures  which  shall  be  fairly 
representative  of  the  entire  group.  The  summary  figure  most 
commonly  used  is  the  average;  in  fact  averages  play  so  important 
a  part  in  all  statistical  work  that  Statistics  is  sometimes  called 
"  the  science  of  averages." 

The  term  "  average  "  is  used  loosely  in  common  parlance  to 
mean  "  typical,'^  but  for  statistical  purposes  the  average  must  be 
defined  exactly.  The  simple  arithmetic  average  is  obtained  by 
dividing  the  total  simi  by  the  number  of  items  or  units  in  the 
group.  Thus  in  a  retail  store,  in  which  the  annual  sales  amount 
to  $64,284  and  which  employs  six  salespersons,  the  average  annual 
sales  per  salesperson  are  $10,714.  This  method  of  computing 
averages  is  conunon  and  it  is  generally  understood. 

The  simple  arithmetic  average,  however,  is  frequently  unsatis- 
factory asXsummary  figiif eT  If  the  group  is  not  homogeneous,  if 
the  extremes  are  far  apart  and  the  distribution  between  the  ex- 
tremes uneven,  the  arithmetic  average  may  not  be  identical  with 
or  even  representative  of  any  of  the  constituent  parts  of  the 
group;  the  average  may  fall  at  a  point  that  does  not  correspond 
exactly  with  any  items  in  the  group.  A  few  items  at  either  ex- 
treme of  a  non-homogeneous  group  that  covers  a  wide  range 
may  exercise  a  distorting  influence  upon  the  arithmetic  average. 
Under  some  circmnstances  the  arithmetic  average  may  fail  to 
show  changes  within  a  large  group.  The  average  wage  for  the  em- 
ployees of  a  factory  may  remain  stationary  while  conditions  are 
changed.  A  small  number  of  highly  paid  employees  may  receive 
an  increase  in  wages  while  the  wages  of  a  larger  number  of  less 
highly  paid  men  are  reduced,  the  changes  just  balancing  them- 
selves in  the  average.  The  average  wage  may  be  lowered  in 
another  instance  merely  because  of  the  employment  of  a  larger 
number  of  low-paid  workmen,  without  any  change  in  the  rates  of 
remuneration  for  any  class  of  labor.    Consequently,  the  average 


20  BUSINESS  STATISTICS 

wage  is  a  worthless  figure  whenever  the  group  for  which  it  is  com- 
puted includes  different  classes  of  labor  with  varying  rates  of  re- 
muneration; it  throws  light  neither  upon  labor  cost  nor  upon  the 
welfare  of  the  laborers.  Numerous  other  averages  must  be  simi- 
larly qualified.^  It  is  in  such  cases  as  the  preceding  that  a  classifi- 
cation of  the  data  is  especially  essential  if  comparisons  are  to  be 
made. 

Misleading  results  are  frequently  obtained  by  improperly  com- 
puting an  average  of  averages  or  of  percentages.  The  following 
examples  will  make  this  plain.  The  operating  income  of  the  rail- 
roads in  the  United  States  during  the  fiscal  year  ending  June  30, 
1915,  was  as  follows:  Eastern  District,  $299,024,764;  South- 
ern District,  $95,355,184;  Western  District  $327,325,769;  and 
the  total  for  the  United  States,  $721,705,717.  The  mileage  repre- 
sented in  the  Eastern  District  was  58,874;  in  the  Southern  Dis- 
trict 42,320;  in  the  Western  District  127,360;  and  the  total  for 
the  United  States  228,554.  Thus  the  average  operating  income 
per  mile  of  line  was  $5,079  in  the  Eastern  District,  $2,253  ^^  the 
Southern  District,  and  $2,570  in  the  Western  District.  The  aver- 
age per  mile  for  the  United  States  as  a  whole,  however,  was  not 

5079-^22534-2570  721,705,717 

=  ^^01,  but =^it:8;  for  this  pur- 

3  '^^  228,554        ^  ^  '  ^ 

pose  the  total  operating  income  of  all  the  roads  in  the  United 
States  is  divided  by  the  total  mileage.  The  average  of  the  groups 
wrongly  gives  equal  weight  to  all. 

A  second  example  throws  further  light  on  this  matter.  If  it  is 
desired  to  determine  the  average  loss  per  fire  during  the  years 
1888-1914  from  the  statistics  in  the  following  table,  the  sum  of 
the  annual  fire  losses  —  $4,147,119,  is  divided  by  the  total 
number  of  fires  during  the  period  —  3,133.  The  average  loss  per 
fire  is  thus  found  to  have  been  $1,324.  The  average  of  the  yearly 
figures  for  the  average  loss  per  fire  —  that  is,  the  sum  of  the  fig- 
ures in  column  3  divided  by  27,  the  niunber  of  years  —  which  is 

1  Another  type  of  average  is  the  geometric  mean.  It  has  been  little  used  by- 
statisticians  and  does  not  appear  to  have  any  practical  application  for  business 
purposes.  It  is  explamed  by  A.  L.  Bowley,  Elements  of  Statistics,  3d  ed.,  pp.  128- 
129. 


STATISTICAL  METHODS  21 

$1,574,  is  not  the  correct  figure  to  use;  for  then  the  years  1888 
and  1889  would  be  given  equal  weight,  though  one  suffered 
almost  ten  times  as  much  as  the  other. 

Annual  Fire  Loss,  Springfield,  Mass. 


Fire  Loss 

Number  Average 
of        Loss  per 
Fires         Fire 

Fire  Loss 

Number 

of 

Fires 

Average 

Loss  per 

Fire 

1888 

$181,265 

40 

$4,531 

1903 

$34,454 

108 

$319 

1889 

22,430 

45 

498 

1904 

66,422 

140 

474 

1890 

35,019 

60 

584 

1905 

200,779 

106 

1,894 

I89I 

227,612 

62 

3,671 

1906 

126,590 

lOI 

1,253 

1892 

53,428 

30 

1,781 

1907 

505,942 

141 

3,588 

1893 

376,449 

73 

5,157 

1908 

99,505 

160 

620 

1894 

60,403 

84 

719 

1909 

71,707 

189 

379 

1895 

45,168 

67 

674 

1910 

247,341 

178 

1,390 

1896 

54,380 

56 

971 

1911 

282,681 

221 

1,279 

1897 

65,049 

74 

879 

1912 

204,289 

261 

783 

1898 

237,775 

65 

3,658 

1913 

271,316 

271 

1,001 

1899 

97,610 

91 

1,073 

1914 

318,668 

30s 

1,045 

- 

46,669 

73 

639 

1900 

I90I 

120,911 

48 

2,519 

$4,147,119 

3,133 

1902 

93,257 

84 

1,110 

Average  loss  per  fire,  27  years,  $1,324. 

The  same  principle  is  frequently  applicable  in  determining 
averages  from  the  internal  statistics  of  a  single  company.  Thus 
the  average  net  revenue  per  kilowatt-hour  of  the  Buffalo  General 
Electric  Company  in  1913  was  4.05  cents — determined  from  the 
statistics  in  the  table  on  the  next  page  by  dividing  the  total  Net 
Revenue  ($1,413,203)  by  the  total  number  of  kilowatt-hours  sold 
(34,855,537).  The  average  revenue  per  kilowatt-hour  was  not 
4.79  cents,  the  result  obtained  by  averaging  the  figures  for  the 
average  net  revenue  per  kilowatt-hour  for  each  of  the  nine  classes 
of  service  of  the  company.  The  classes  are  so  unequal  in  volume 
that  an  average  of  the  averages  is  not  representative. 

In  this  instance,  as  in  those  preceding,  by  determining  the  aver- 
age from  the  totals  the  figures  weight  themselves  and  give  a  true 
average. 

Occasionally  a  grossly  misleading  average  is  figured  by  taking 
the  mean  between  the  extremes  of  a  series;  the  sum  of  the  highest 
and  lowest  figures  is  divided  by  two.   The  result  is  only  an  average 


22  BUSINESS  STATISTICS 

of  the  extremes,  however,  and  not  an  average  of  the  whole  series 
or  group.  If  the  intermediate  figures  are  known,  the  mean  be- 
tween the  extremes  should  not  be  used  as  an  average. 

A  weighted  average^is  one  that  gives  to  each  item  an  influence 
proportionate  to  its  importance.  If  one  or  more  items  in  a  series 
represents  a  large  portion  of  the  entire  group,  in  determining  the 

Buffalo  General  Electric  Company,  Operating  Revenues,  1913 

Average 
Number  of  Net  Average 

Units  Sold  Net  Per  k.w.h. 

(k.w.h.)  Revenue  Cents 

Municipal  street  lighting,  arc 7,442,382  $230,949  3.10 

Municipal  street  lighting,  incandescent.  167,261  5,991  3.58 

Lighting  municipal  building,  electric. . .  374j07i  20,906  5.59 

Municipal  heat  and  power,  electric 51,489  2,768  5.38 

Commercial  flat-rate  lighting 247,597  11,011  4.45 

Commercial  metered  lighting 19,275,928  901,966  4.68 

Commercial  metered  power 7,173,800  231,672  3.23 

Other  electrical  corporations 64,168  2,567  4.00 

Breakdown  service 58,861  5,372  9.13 

34,855,557         $1,413,203  4.05 

average  such  item  or  items  should  be  given  a  weight  correspond- 
ing to  the  estimated  relative  importance  of  each.  Each  item  is 
multiplied  by  the  number  chosen  to  represent  its  weight  and  the 
average  is  obtained  by  dividing  the  sum  of  the  products  by  the 
sum  of  the  weights.  One  of  the  most  common  uses  of  weighting 
is  in  the  preparation  of  index  numbers  of  prices,  which  is  explained 
on  pages  88-94.  When  statistics  are  collected  by  the  sampling 
method,  if  the  various  classes  in  the  group  are  not  proportionately 
represented  in  the  returns,  it  is  sometimes  necessary  to  use  a 
weighted  average  for  smnmarizing  the  results.  Ordinarily,  how- 
ever, the  samples  should  be  selected  so  as  to  make  weighting 
unnecessary,  and  there  are  few  instances  where  a  system  of 
estimated  weights  need  be  applied  to  statistics  used  for  business 
purposes. 

Although  the  arithmetic  average  is  the  summary  figure  which 
is  most  commonly  used,  it  is  not  always  satisfactory  and  for  some 
purposes  the  median  or  the  mode  is  to  be  preferred.  The  median 
may  be  defined  as  the  middle  item  of  the  group  when  the  constitu- 


STATISTICAL  METHODS  23 

ent  items  have  been  arranged  in  order  of  their  size.  For  example, 
if  73  items  are  included  in  the  series,  the  median  is  the  37th  item; 
fifty  per  cent  of  the  items  in  the  series  are  less  than  the  37th  item 
and  fifty  per  cent  are  greater.  The  median  is  an  exact  figure;  it 
corresponds  to  at  least  one  item  in  the  series  or  group;  and  it  is 
not  influenced  by  the  extremes.  Nevertheless,  the  class  in  which 
it  falls  may  be  relatively  small  and  not  typical,  and  it  may 
be  above  or  below  the  average  if  the  progression  of  items  is 
irregular. 

The  median  may  be  supplemented  by  quartiles  or  deciles.  The 
item  in  the  series  half-way  between  the  low  extreme  and  the 
median  is  the  lower  quartile  and  the  item  half-way  between  the 
median  and  the  high  extreme  is  the  upper  quartile.  If  the  items 
of  the  series,  arranged  in  order  of  magnitude,  are  divided  into  ten 
groups,  each  of  which  contains  the  same  number  of  items,  the 


Weekly  Wage 

Number  of 
Employees 

We^  Wage 

r^£pifnkAs 

Number  of 
Employees 

$4.40 

19 

57 

5.20 

5 

10.00 

I 

6.00 

12 

10.60 

38  -^ 

6.84 

16 

14  J^ 

10.72 
12.15 

23 
17 

7.60 

36 

13.50 

2 

8.00 

5 

14.37 

5. 

/v»0^£r-!>8.2S 

55 

16.92 

I 

8.37 

16 

20.90 

37 

>-rr' 


^.^^^ 


largest  item  in  each  group  is  a  decile,  the  first,  second,  third 
.  .  .  tenth,  the  deciles  thus  indicating  by  their  nearness  to  each 
other  the  degree  of  concentration  in  the  series*  The  first  decile 
has  ten  per  cent  of  the  items  below  it  and  the  fourth  decile  has 
forty  per  cent  of  the  items  below  it.  The  median,  quartiles,  and 
deciles  are  concerned  only  with  the  number  of  items  in  the  series, 
not  with  their  range.  They  serve  to  show  the  regularity  of  dis- 
tribution. 

The  mode,  a  summary  figure  of  wide  applicability,  is  the  point 
of  greatest  frequency  or  density  in  the  series,  the  point  about 
which  there  is  the  greatest  concentration.  Consequently,  if 
clearly  defined,  it  is  the  most  typical  figure.  It  corresponds  ex- 
actly to  the  largest  class  in  the  group  and  it  is  uninfluenced  by  the 


24  BUSINESS  STATISTICS 

extremes.  In  order  to  determine  the  mode  it  is  essential  that  the 
data  be  grouped  in  classes  of  equal  range.  For  illustration  the 
statistics  on  the  preceding  page,  taken  from  the  payroll  of  a 
cotton  mill,  must  be  re-classified  before  they  can  be  used  for 
determining  the  mode  of  the  series. 

If  these  figures  are  re-classified  in  even  classes  of  $0.50  range, 
we  have  the  following  table:  — 


Weekly  Wage 

Number  of 
Employees 

Weekly  Wage 

Number  of 
Employees 

$4.oi-$4.50 

19 

$12.51- 

$13.00 

0 

4.51-  5.00 

0 

13.01- 

13.50 

2 

5.01-  S-50 

5 

13-51- 

14.00 

0 

5.51-  6.00 

12 

14.01- 

14.50 

5 

6.01-  6.50 

0 

14.51- 

15.00 

0 

6.51-  7.00 

16 

15.01- 

15.50 

0 

7.01-  7.50 

14 

15-51- 

16.00 

0 

7.51-  8.00 

41 

16.01- 

16.50 

0 

■^.01-  8.50 

71 

16.51- 

17.00 

I 

8.51-  9.00 

0 

17.01- 

17-50 

0 

9.01-  9.50 
9.51-10.00 

0 

58 

17-51- 
18.01- 

18.00 
18.50 

0 
0 

10.01-10.50 

0 

18.51- 

19.00 

0 

10.51-11,00 

61 

19.01- 

19.50 

0 

11.01-11.50 

0 

19.51- 

20.00 

0 

11.51-12.00 

0 

20.01- 

20.50 

0 

12.01-12.50 

17 

20.51- 

21.00 

37 

The  largest  class  is  that  which  receives  a  weekly  wage  of  $8.01 
to  $8.50,  which  includes  71  employees.  The  largest  item  in  that 
class  is  for  the  wage  group  of  $8.25.  Hence,  $8.25  is  the  mode  of 
the  wages  received  by  the  employees  in  this  mill.  If  the  mode  had 
not  been  clearly  indicated  by  this  classification,  a  re-grouping  with 
a  wider  range  would  have  been  necessary. 

The  above  figures  may  also  be  used  to  illustrate  the  average 
and  the  median  wage  for  this  group.  The  arithmetic  average  is 
the  total  sum  of  wages  paid  ($3,609.54)  divided  by  the  total  num- 
ber of  employees  (359),  or  $10.05.  This  average  does  not  corre- 
spond exactly  with  the  wage  received  by  any  employee  and  it  is 
clearly  rendered  unrepresentative  by  the  influence  which  the 
class  of  employees  receiving  $20.90  per  week  has  upon  the  result. 
Since  there  are  359  employees  in  the  group,  the  median  wage  is 


STATISTICAL  METHODS  25 

that  which  is  received  by  the  i8oth  employee,  counting  up  from 
the  bottom  of  the  wage  scale.  The  i8oth  employee  is  in  the  $9.85 
class.  In  other  words  one-haK  of  the  employees  receive  $9.85  or 
more  per  week.  The  lower  quartile  is  the  90th  item,  which  occurs 
in  the  $7.60  class,  and  the  upper  quartile  is  the  270th  item,  which 
occurs  in  the  $10.60  class. 

In  the  example  just  cited  the  classified  table,  which  shows  the 
relative  distribution  of  the  employees  according  to  their  earn- 
ings, is  more  instructive  than  any  single  summary  figure.  The 
classes  of  employees  are  obviously  of  such  unequal  skill  and  capa- 
bility that  the  series  is  not  one  of  regular  progression  and  a  single 
summary  figure  cannot  satisfactorily  represent  the  entire  group; 
under  such  circumstances  even  the  mode  is  of  limited  significance 
for  practical  purposes. 

A  better  illustration  of  the  use  of  the  mode  is  in  the  following 
case,  in  which  statistics  from  the  Report  of  the  Tariff  Board  on 
Schedule  K  are  utilized.  These  statistics  state  the  percentages 
of  actual  producing  time  to  net  operating  time  for  the  looms  oper- 
ated by  505  weavers  (women)  engaged  in  weaving  plain  serge. 
"  Net  operating  time  "  is  the  total  time  that  the  weavers  were 
in  the  mills  less  the  amount  of  time  lost  in  filling  looms  and  in 
making  repairs  to  looms;  these  losses  of  time  were  due  to  condi- 
tions beyond  the  control  of  the  weavers.  "  Actual  producing 
time  "  is  the  time  that  the  looms  were  actually  kept  in  motion. 
The  difference  between  "  net  operating  time "  and  "  actual 
producing  time  "  therefore  represents  time  lost  in  stoppages  for 
which  the  weavers  were  responsible.  The  figures  are  presented  as 
they  have  been  classified  from  the  original  data  published  in  the 
Tariff  Board's  report. 


Percentage  of  Actual 

Producing  Time  to  Net 

Operating  Time 

Number  of 
Looms 

Percentage  of  Actual 

Producing  Time  to  Net 

Operating  Time 

Number  of 
Looms 

30%-34.9% 

2 

6s%-69.9% 

72 

35     -39-9 

8 

70    -74.9 

88 

40    -44.9 

6 

75    -79-9 

71 

45     -49-9 

12 

80    -84.9 

38 

50    -54-9 

36 

8s    -89-9 

31 

55     -59-9 

46 

90    -94.9 

IS 

60    -64.9 

73 

95     -99-9 

7 

26  BUSINESS  STATISTICS 

The  mode  is  in  the  70-74.9%  class.  To  locate  the  mode  ex- 
actly within  that  class  the  figures  for  the  class  are  arranged  ac- 
cording to  narrow  classes,  as  follows:  — 


7o%-7o.9% 

13 

73%-73.9% 

23 

71    -71.9 

18 

74    -74.9 

16 

72    -72.9 

18 

The  mode  may  therefore  be  taken  as  73  per  cent;  in  this  case 
it  is  impractical  to  try  to  fix  the  mode  in  fractions  of  one  per 
cent. 

Although  the  above  figures  were  collected  from  several  mills, 
they  are  typical,  and  many  individual  mills  could  advantageously 
keep  such  records  continuously  for  establishing  standards  of  per- 
formance by  means  of  which  to  check  up  the  current  work  of 
weavers.  Judging  from  these  figures  a  manufacturer  operating 
under  these  conditions  would  be  warranted  in  establishing  73 
per  cent  of  net  operating  time  as  a  minimum  standard  which 
should  be  reached  by  all  weavers  engaged  in  weaving  plain  serge. 
Although  aiming  at  100  per  cent,  or  perfection,  it  is  obvious  that 
it  could  not  be  reached,  whereas  according  to  these  figures  73  per 
cent  is  a  fairly  attainable  minimum  standard  for  all.  Even  if 
the  weavers  are  paid  piece  rates,  the  interest  charges  on  partially 
operated  machinery  and  other  losses  through  low  productivity 
amount  to  large  sums,  a  considerable  portion  of  which  might  be 
saved  if  all  of  the  weavers  could  be  induced  to  keep  their  looms 
in  operation  at  least  73  per  cent  of  the  net  operating  time.  Since 
the  mode  is  not  influenced  by  the  extremes,  it  is  apparently 
better  than  the  average  as  a  means  of  establishing  a  standard 
in  such  a  case  as  this.^ 

The  mode  can  likewise  be  used  in  establishing  standards  from 
the  figures  obtained  in  time  studies  of  factory  operations.  The 
time  taken  in  setting  the  cutter  on  a  lathe  in  a  machine  shop,  as 
shown  by  a  series  of  52  observations,  was  as  follows: 

*  As  a  matter  of  policy,  in  any  particular  case  it  might  be  desirable  to  set  the 
standard  of  performance  above  the  mode,  but  the  exact  point  would  be  determined 
with  reference  to  the  mode  and  the  concentration  around  it.  These  statements  do 
not  imply,  of  course,  that  this  is  the  only  nor  necessarily  always  the  best  method 
of  task-setting. 


STATISTICAL  METHODS  2/ 


Time 

undredths  of 
a  Minute) 

Number  of 

Observations 

Recorded 

9 

2 

lO 

9 

II 

13 

12 

II 

13 

S 

Time 

(Hundredths  of 
a  Minute) 

Number  of 

Observations 

Recorded 

14 

3 

IS 

5 

i6 

o 

17 

2 

i8 

2 

This  table  summarizes  the  figures  recorded  upon  the  observa- 
tion sheet.  The  mode  of  the  observations  is  ii-hundredths  of  a 
minute;  in  other  words  the  workmen  set  the  cutter  most  fre- 
quently in  1 1 -hundredths  of  a  minute.  The  significance  of  the 
mode  is  enhanced  by  the  fact  that  the  class  next  above  it  and  the 
class  next  below  it  are  each  larger  than  any  other  classes  except- 
ing the  modal  class.  There  is  a  sufficiently  high  degree  of  concen- 
tration of  these  figures  to  warrant  the  choice  of  ii-hundredths  of 
a  minute  as  the  standard  time  for  this  operation. 

The  mode  has  been  used  by  the  Harvard  Bureau  of  Business 
Research  in  summarizing  the  statistics  which  it  has  collected  from 
retail  stores.  In  the  table  below,  which  smnmarizes  statistics 
of  one  hundred  and  thirty  retail  shoe  stores/  the  "  common  fig- 
ures "  are  modes.  For  each  item  there  was  a  marked  concentra- 
tion of  the  figures  around  the  mode.  The  "  figures  shown  by  a 
more  efficient  group  of  stores  "  are  what  may  be  called  minor 
modes;  they  are  figures  around  which  there  was  also  concentra- 
tion but  less  than  around  the  major  modes. 

The  same  method  was  followed  by  the  Bureau  in  smnmarizing 
the  figures  for  retail  grocery  stores.^  These  modal  figures  fur- 
nish the  retailers  with  rehable  standards  by  means  of  which  they 
can  check  up  their  own  results.  The  modes  are  obviously  better 
than  averages  for  this  purpose  since  the  modes  are  not  influenced 
by  the  figures  for  any  exceptional  stores  at  either  extreme. 

The  significance  of  the  mode  of  any  series  of  figures  depends 
upon  the  degree  of  concentration.    If  the  figures  in  the  series  are 

*  Bulletin  Number  i,  Bureau  of  Business  Research,  Harvard  University.  These 
figures  were  not  materially  affected  by  returns  from  650  stores;  the  modes  remained 
the  same. 

*  Expenses  in  Operating  Retail  Grocery  Stores,  Bulletin  Number  5,  Bureau  of 
Business  Research,  Harvard  University. 


28 


BUSINESS  STATISTICS 


fairly  evenly  distributed,  without  pronounced  concentration,  the 
mode  is  difficult  of  determination  and  of  limited  usefulness.  In 
such  a  case  the  average  is  ordinarily  of  greater  significance.  If 
there  is  a  marked  concentration  in  the  middle  classes  of  the  group, 
the  average,  median,  and  mode  tend  to  coincide.  The  more  un- 
symmetrical  the  distribution,  the  greater  are  the  divergencies  of 
the  average,  median  and  mode  from  each  other.    If  the  number 

SxjMMARY  Table  of  Percentages  and  Other  Figures  for  Retail 
Shoe  Stores 


Item 

[For  Percentages,  Net  Sales  = 

ioo%] 

Low 

High 

Common  Figures 

Percentage  about 
which  a  Concentra- 
tion is  Sufficient  to 
Indicate  a  Realiz- 
able Standard 

Gross  profit 

Total  operating  expense. . 

Buying  expense 

Salesforce . 

Advertising 

Deliveries 

Rent 

Interest  

% 
20 

18 

0.8 
S-o 
0.0 
0.0 
1.8 
1.0 

% 
42 

35 

1.8 

10.3 

8.8 

14 
14.6 

7-9 

% 
Low  grade  23-25 
High  grade  30-33 
Low  grade  23 
High  grade  27 

I.I 

8.0 

2.0 

0.6 

S-o 

2-5 

% 

Low  grade  20 
High  grade  25 

1.0 

7.0 

i-S 
0.4 

3-0 

2.0 

Number  of  stock-turns  a 
year 

Annual   sales   of   average 
salesperson 

1.0 
$5,000 

3.6 
$16,500 

1.8 
$10,000 

2-5 

of  items  in  the  series  is  small,  it  is  not  worth  while  to  attempt  to 
use  the  mode  since  its  position  may  be  changed  by  the  addition  of 
a  few  more  items;  this  is  also  true  of  the  median;  in  such  cases 
the  average  is  more  significant  than  either  the  median  or  the  mode. 
In  deciding  whether  the  average  or  the  mode  is  to  be  used  in 
any  particular  case,  reference  must  be  had  to  the  nature  of  the 
statistics  and  to  the  object  sought.  As  just  stated,  if  the  distri- 
bution is  fairly  even,  so  that  the  mode  is  difficult  of  determina- 
tion, the  average  will  usually  be  preferred.  But  when  the  mode 
is  clearly  defined,  it  is  especially  useful  in  determining  standards. 
After  a  standard  has  been  determined  by  the  mode,  the  results  of 


STATISTICAL  METHODS  29 

later  operations  or  observations  can  oftentimes  best  be  compared 
with  the  modal  standard  by  means  of  averages.  The  average 
gives  full  weight  to  the  extremes,  and  this  is  desirable  if  a  com- 
parison of  current  results  with  established  standards  is  the  object. 
In  such  a  case  as  that  of  the  serge  weavers,  for  which  statistics 
were  given  on  page  25,  after  a  standard  of  performance  has  been 
set  by  the  mode  the  average  of  the  results  for  a  current  week  for 
all  weavers  on  that  kind  of  work  in  a  mill  could  be  compared  with 
the  standard  to  show  how  far  the  total  results  fell  short  of  the 
standard.^  For  such  a  purpose  the  extremely  high  and  the  ex- 
tremely low  figures  should  be  included  in  the  average.  The  modal 
figure  for  the  current  week,  unaffected  by  the  extremes,  would 
not  show  the  degree  of  attainment  of  the  entire  group. 

From  what  has  been  stated  in  the  foregoing  pages,  it  is  evident 
that  the  larger  the  number  of  observations  or  the  more  compre- 
hensive the  records,  the  greater  is  the  significance  of  the  average 
or  other  summary  figures  which  are  worked  out.  This  is  due  to 
what  is  sometimes  called  the  **  inertia  of  large  niunbers  "  or  the 
"law  of  averages."  The  larger  the  mass,  the  less  is  the  influence 
of  exceptional  instances.  Statistics  serve  not  only  as  a  check  upon 
current  operations  but  also  as  guides  for  the  formulation  of  future 
policies  since  we  can  assume  that,  if  we  have  a  sufficiently  broad 
basis  for  our  conclusions,  the  same  results  will  probably  be  shown 
under  similar  conditions  in  the  future  as  in  the  past.  It  is  upon 
this  theory  of  probabilities  that  statistical  science  is  founded. 

II.  Statistical  Units  ^ 
By  G.  p.  Watkins 

The  name  statistics  denotes  both  a  method,  or  methods,  of  utiliz- 
ing a  certain  class  of  facts  for  scientific  or  practical  purposes,  and 
also  the  facts  or  materials  of  knowledge  that  may  be  so  utilized. 
It  is  with  the  materials  accessible  to  exploitation  by  statistical 

1  The  results  shown  by  each  weaver  would,  of  course,  be  compared  with  the 
standard  by  the  overseer  of  the  weaving  department.  The  comparison  of  the 
average  with  the  standard  would  be  of  most  interest  to  the  mill  superintendent, 
who  is  not  so  much  interested  in  the  records  of  individual  weavers  as  in  totals. 

*  Quarterly  Journal  of  Economics,  xxvi,  pp.  673-702.  Reprinted  by  permission 
of  the  Quarterly  Journal  of  Economics, 


30  BUSINESS  STATISTICS 

methods  that  this  paper  deals.  These  materials  are  superficially 
distinguished  as  being  numerical.  Is  it  to  be  inferred  that  all 
numbers  are  statistics  ?  Or,  to  put  the  same  question  in  a  differ- 
ent way,  are  they  all  statistical  material  of  equal  grade  ? 

Statistics  combines  units  into  aggregates  and  recombines  ag- 
gregates into  totals.  For  comparison,  the  aggregates  are  then 
analyzed  and  condensed  into  significant  averages  and  ratios.  The 
quality  of  the  product  of  these  processes  depends  upon  the  ade- 
quacy of  methods  employed  and  upon  the  quality  of  the  raw  ma- 
terial. The  quality  of  the  material  is  conditioned  by  the  character 
of  the  unit  and  by  the  completeness  and  correctness  of  the  com- 
bination of  the  units  into  aggregates.  In  other  words,  the  quality 
of  statistical  material  varies  with  the  adequacy  of  the  count  and 
with  the  character  of  the  unit  counted. 

As  regards  the  comparative  importance  of  accuracy  in  enumera- 
tion and  compilation,  on  the  one  hand,  and  of  the  character  of 
the  unit  dealt  with,  on  the  other,  it  is  sufficient  here  to  affirm  the 
equal  importance  of  the  latter  and  let  the  following  pages  be  the 
evidence.  So  far  as  accuracy  means  exactness  as  distinguished 
from  mere  representativeness  (if  it  might  be  assumed  that  we 
could  have  the  second  without  a  good  deal  of  attention  to  the  first) 
the  superior  importance  of  the  character  of  the  statistical  unit, 
though  so  little  noticed,  should  be  evident  to  those  having  ac- 
quaintance with  the  actual  processes  of  statistical  cmnulation. 

The  uses  to  which  numerical  data  may  be  put  depend  upon  the 
kind  of  unit  more  fundamentally  than  upon  anything  else.  The 
quality  of  a  product  is  always  conditioned  or  limited  by  its  in- 
gredients. It  is,  of  course,  fundamental  to  know  what  the  unit 
employed  means,  that  is,  its  denotation  and  connotation  must  be 
clear.  But  when  all  requirements  of  definition  and  conception 
are  met,  the  unit  may  still  be  good  or  bad,  and  consequently,  the 
numbers  obtained  more  or  less  amenable  to  statistical  use.  It  is 
an  incident  of  this  distinction  that  some  divisions  of  statistics,  in 
their  existing  state,  must  be  given  lower  scientific  rank  than 
others. 

The  scheme  of  classifying  statistical  units  here  proposed  is  as 
follows:  — 


STATISTICAL  METHODS 


31 


A.  Individual  things  the  quantity  of  which  is  determined  by 
counting. 

1.  Natural  kinds  and  events  relating  to  natural  kinds. 

2.  Produced  kinds  and  produced  qualities  of  things. 

B.  Mensurational  units  which  are  applied  to  determine  quan- 
tity without  regard  to  individuality. 

3.  Physical  measures  (of  length,  capacity,  etc.). 

4.  Measures  of  pecuniary  value. 

These  classes  of  units  are  arranged  in  the  descending  order  of 
their  statistical  quality.    In  this  order  we  shall  discuss  them. 

The  Natural  Kind 

The  conception  of  a  distinction  of  kinds  as  developed  by  J.  S. 
Mill  in  his  Logic  (book  I,  chap,  vii,  §  4)  is  as  follows:  — 

There  are  some  classes,  the  things  contained  in  which  differ  from  other 
things  only  in  certain  particulars  which  may  be  numbered,  while  others  differ 
in  more  than  can  be  numbered,  more  even  than  we  need  ever  expect  to  know. 
Some  classes  have  little  or  nothing  in  common  to  characterize  them  by, 
except  precisely  what  is  connoted  by  the  name:  white  things,  for  example, 
are  not  distinguished  by  any  common  properties  except  whiteness;  or  if  they 
are,  it  is  only  by  such  as  are  in  some  way  dependent  on,  or  connected  with, 
whiteness.  But  a  hundred  generations  have  not  exhausted  the  common 
properties  of  animals  or  of  plants,  of  sulphur  or  of  phosphorus.  ...  If  any 
one  even  chooses  to  say  that  the  one  classification  is  made  by  nature,  the 
other  by  us  for  our  convenience,  he  will  be  right;  provided  he  means  no 
more  than  this :  Where  a  certain  apparent  difference  between  things  (though 
perhaps  in  itself  of  little  moment)  answers  to  we  know  not  what  number  of 
other  differences,  pervading  not  only  their  known  properties,  but  properties 
yet  undiscovered,  it  is  not  optional  but  imperative  to  recognize  this  differ- 
ence as  the  foimdation  of  a  specific  distinction. 

Demography,  or  population  statistics,  has  for  its  principal  unit 
the  hmnan  individual,  and  human  individuals  constitute  a  natu- 
ral kind.  Other  examples  of  natural  kinds  in  statistics  are  the 
various  raw  products  of  the  animal  and  vegetable  world,  the  num- 
bers of  which  are  usually  obtained  by  counting  discrete  units. 

It  is  evident  that  where  the  statistical  unit  is  a  natural  kind  it 
is  superior  in  respect  of  both  definiteness  and  fulness  of  meaning 
to  any  that  requires  an  artificial  distinction,  however  well 
thought  out.  It  follows  that,  other  things  equal,  the  highest 
grade  of  statistics  is  composed  of  numbers  relating  to  natural 


32  BUSINESS  STATISTICS 

kinds.  Though  the  best  examples  are  the  orders,  species,  etc.,  of 
animals  and  plants,  any  natural  and  therefore  more  or  less  gene- 
alogical method  of  distinguishing  objects  would  give  classes  of  the 
same  character.  "  Sticks  and  stones,"  as  well  as  animals  and 
plants,  might  be  divided  into  natural  kinds,  though  probably  differ- 
ences of  behavior  are  so  helpful  in  classification  that  unmanu- 
factured inanimate  objects  would  not  so  readily  lend  themselves 
to  the  differentiation  of  kinds  as  do  living  things.  But  a  genealogy 
of  atoms  and  molecules  and  even  of  their  associations  and  mix- 
tures is  conceivable;  and  it  could  not  fail  to  show  natural  differ- 
ences of  kind. 

Natural  classification  is  the  opposite  of  mathematical.  A  math- 
ematical classification  might  be  arrived  at  by  a  development  of 
the  permutations  and  combinations  of  specified  qualities  which 
would  make  of  each  combination  a  species.  In  a  natural  classifi- 
cation, definition  does  not  depend  on  a  single  point  but  oftener 
upon  a  combination  of  characters,  some  of  which  may  be  absent. 
To  classify  plants  merely  according  to  the  number  of  pistils  and 
stamens  is  in  this  sense  "  mathematical."  Defining  by  reference 
to  a  single  point  and  hinging  classification  on  such  definition  is  a 
thing  to  guard  against.  Distinctiveness,  in  the  sense  of  recogniz- 
abihty,  is  not  to  be  attained  that  way,  any  more  than  is  a  work- 
able classification.  Statisticians  sometimes  fail  to  distinguish 
between  clearness  of  discrimination  —  which  is  best  tested  by 
promptness  of  recognition  —  and  sharpness  of  definition. 

A  very  great  advantage  of  the  natural  kind  as  a  unit  consists  in 
its  ordinarily  being  recognizable  without  the  aid  of  definition.  It 
is  not  necessary  for  the  enumerator  to  exercise  great  discrimina- 
tion in  determining  whether  an  animal  is  a  horse  or  a  cow.  This 
is  not  the  same  as  saying  that  there  will  be  no  doubtful  cases  in 
the  discrimination  of  natural  kinds,  cases  where  the  use  of  care- 
fully devised  definition  must  be  resorted  to.  But  the  discrimina- 
tion of  the  natural  kind  does  not  ordinarily  depend  upon  them, 
while  in  the  case  of  an  arbitrary  or  "  mathematical  "  classifica- 
tion it  is  likely  to. 

Statistics  relating  to  sex  and  race  deal  with  differences  of  kind. 
This  fact  adds  greatly  to  the  significance  of  the  results  of  a  count, 


STATISTICAL  METHODS  33 

even  where,  as  in  the  case  of  races,  mixtures  are  of  frequent  occur- 
rence and  definition,  therefore,  not  easy.  The  different  species  of 
domestic  animals  are  also  natural  kinds.  Ox-hides  are,  conse- 
quently, a  natural  kind,  but  shoes  are  not.  A  census  of  farm  ani- 
mals gives  reliable  results  strictly  in  proportion  to  the  care  with 
which  the  eniuneration  is  made,  while  a  census  of  occupations 
or  of  manufacturing  establishments  may  give  somewhat  uncer- 
tain and  disputed  results  despite  the  greatest  care  and  conscien- 
tiousness. 

Variation  in  the  size  of  units  may  be  urged  as  an  objection  to 
the  adequacy  of  counting  as  a  means  of  determining  quantity. 
In  the  case  of  a  natural  kind  such  variation  is  easily  disposed 
of.  It  is  ordinarily  quite  regularly  distributed  about  a  mean.  If 
it  be  desirable  to  gage  the  character  and  range  of  such  varia- 
tion, the  problem  is  one  with  which  the  statistical  method  is 
especially  competent  to  deal.  This  is  the  nature  of  most  statis- 
tical biology. 

Variations  in  size  may  be  studied  as  a  means  to  the  further  and 
fuller  characterization  of  the  kind.  Counting  by  size  classes  and 
sub-classes  may  be  a  sufficient  substitute  for  detailed  measures. 
Coefficients  of  variation  for  such  variations  as  are  of  fairly  con- 
stant character  may  thus  be  determined.  When  the  variation, 
both  quantitative  and  qualitative,  about  the  mean  is  found  to  be 
very  nearly  constant,  once  these  coefficients  are  determined,  totals 
may  convey  all  the  information  that  it  is  necessary  to  obtain  by 
actual  count,  the  rest  being  easily  estimated.  It  would  seldom 
be  necessary  to  specify  the  quantity  of  the  sizes  of  grains  in  a 
bushel  of  wheat,  or  of  fish  in  a  catch,  or  of  range  cattle  in  a  herd. 

Natural  kinds  may  undergo  secular  or  evolutionary  change. 
Cattle  have  increased  greatly  in  weight  in  the  past  few  centuries. 
This  is  an  important  statistical  element  which  might  seriously 
affect  a  comparison.  But  the  presence  of  such  a  change  is  easily 
ascertained.  To  make  proper  allowance  for  its  influence  is  not 
difficult.  Secular  change  in  the  character  of  the  statistical  unit  is 
one  of  the  least  troublesome  phases  of  definiteness. 

Counting  is  the  usual  method  of  obtaining  statistics  of  natural 
kinds.    Measuring,  though  sometimes  a  practical  convenience, 


34  BUSINESS  STATISTICS 

is  never  a  logical  necessity.  Counting  will  tell  more  than  mere 
measuring. 

Differences  in  the  degree  of  some  quality  of  a  natural  kind  par- 
take of  the  statistical  character  of  the  unit  to  which  they  pertain. 
Age  is  an  example.  That  it  is  measured  in  terms  of  astronomical 
periods  is  logically  an  accident.  Ages  represent  differences  in  the 
degree  or  stage  of  development  of  a  group  of  natural  qualities, 
called,  according  to  the  varying  stages,  youth,  maturity,  senility, 
etc. 

Births  and  deaths  are  events  relating  to  natural  kinds  and  they 
have  a  corresponding  statistical  standing.  Thus  vital  statistics 
in  general  have  a  unit  of  the  first  order.  But  the  status  of  a  mar- 
riage is  somewhat  different.  At  least  as  legally  defined,  it  is  as 
much  artificial  as  natural. 

To  summarize  the  conclusions  drawn  from  the  foregoing:  Sta- 
tistics of  natural  kinds  are  superior  to  such  as  are  based  upon  some 
other  sort  of  unit,  both  negatively  and  positively.  Misunder- 
standings of  the  informant,  of  the  enumerator,  and  of  the  compiler 
should  be  at  a  minimum  in  the  case  of  such  a  unit.  Instruction  in 
niceties  of  definition  is  seldom  necessary.  And  this  ready  recog- 
nizability  is  no  accident;  it  results  from  the  nature  of  things. 
Positively,  also,  such  statistics  have  fuller  meaning  and  may  at 
any  time  develop  an  unexpected  significance.  A  division  into 
natural  kinds  is  more  concrete  than  one  requiring  abstract  defi- 
nition. Relations  with  other  objects  are  clearest  where  the  terms 
are  ordinarily  concrete  or  discrete  kinds.  Much  may  be  made  of 
statistics  of  natural  kinds  even  where  there  has  been  no  careful 
attention  to  classification. 

Products  as  Statistical  Units 

In  calling  the  second  order  of  statistical  units  "  produced  "  ob- 
jects we  bring  in  the  idea  of  economic  production.  Economic 
goods  are  the  result  of  modifications  of  natural  materials  for  hu- 
man uses  and  purposes.  The  materials  may  still  have  the  proper- 
ties of  natural  kinds.  But  the  statistics  of  such  things  will  relate 
primarily  to  the  distinctly  produced  quaHties.  Classes  of  these 
are  not  fixed  and  objectively  definite.    The  purpose  and  function 


STATISTICAL  METHODS  35 

of  the  same  article  may  vary,  and  physically  different  goods  may, 
on  the  other  hand,  be  made  to  serve  the  same  purpose.  A  door 
is  not  a  door  when  it  has  been  converted  into  a  table  top.  But  it 
is  not  so  easy  to  say  when  a  street  car  ceases  by  reason  of  decrepi- 
tude to  be  a  car.  Corn  is  not  fodder  when  it  becomes  fuel.  If  a 
chair  is  something  to  sit  in,  what  is  a  stepladder  chair  ?  Personal 
idiosyncrasy  as  well  as  human  reason  may  be  a  factor  in  such 
classifications. 

The  foregoing  illustrations  suggest  the  fundamental  difference 
between  units  of  the  first  order  and  those  of  the  second  order. 
Among  the  latter,  definition  and  classification  hinge  mainly  upon 
function.  Natural  kinds  are  defined  otherwise.  It  is  significant 
that  the  biologist  finds  functix)nal  characters  of  little  or  no  use  for 
the  purpose  of  classification. 

Manufactured  commodities  and  instruments  and  the  produced 
qualities  of  natural  and  other  objects  comprehend  virtually  the 
whole  of  the  second  order  of  units.  The  drawing  of  the  line  be- 
tween such  objects  and  natural  kinds  is  not  always  so  easy  as 
might  appear,  but  that  need  not  detain  us. 

With  this  sort  of  unit  difficulties  of  definition  do  not,  as  with 
natural  kinds,  amount  to  less  in  practice  than  in  theory.  An  im- 
portant group  of  such  difficulties  consists  of  those  resulting  from 
a  compound  purpose  —  the  case  of  a  tool  that  will  do  several 
things  equally  well,  or  a  wage-earner  who  has  two  occupations. 
Difficulties  of  definition  are  familiar  in  relation  to  numbers  em- 
ployed by  a  particular  concern  or  in  a  particular  occupation. 
Complications  due  to  time  lost,  part-time  employees,  and  subsid- 
iary occupations,  are  ghosts  that  refuse  to  be  laid.  Apparatus  in 
use  or  available  will  be  returned  variously  until  the  use  and  the 
degree  of  need  of  reserves  for  repairs  and  emergencies  becomes 
more  nearly  determinate.  It  is  not  an  accident  that  these  ex- 
amples, though  there  was  no  such  intention,  come  from  industrial 
statistics.  Here  much  more  depends  upon  good  classification,  or 
rather  upon  careful  attention  to  classification  and  definition,  than 
is  the  case  in  dealing  with  natural  kinds. 

Freight  and  passenger  cars  of  the  railways  are  characteristic 
made  kinds,  with  a  good  deal  of  recognizability,  but  sometimes 


36  BUSINESS  STATISTICS 

also  occasioning  much  perplexity  in  border  cases.  How  shall 
cabooses,  how  combination  express  and  mail  cars  be  classified  ? 
One  street  railway  has  been  known  to  return  the  little-used  pri- 
vate car  of  its  president  as  a  freight  car.  Difficulties  are  sure  to 
arise  where  classification  depends  ultimately  upon  purpose,  even 
though  incidental  details  of  physical  construction  ordinarily  help, 
perhaps  in  the  end  only  to  increase  the  doubts  and  difficulties 
when  they  do  arise.  It  is  the  purpose  of  the  maker  and  of  the  user, 
not  the  observer's  notion  of  what  is  suitable,  that  is  referred  to, 
hence  the  criterion  is  comparatively  objective.  To  define  by  the 
purpose  of  the  maker  is  one  way  to  make  the  required  definitions 
clear  and  easily  applied.  This  should  be  done,  even  at  the  cost  of 
some  degree  of  arbitrariness. 

Produced  qualities  as  well  as  produced  objects  have  the  charac- 
teristics of  this  second  sort  of  unit.  Social  status  in  general,  for 
example  conjugal  condition,  probably  belongs  here.  Occupations, 
and  with  them  statistics  of  wages,  clearly  belong  here.  Wages 
really  describe  a  produced  quality  of  the  person  in  the  occupa- 
tion, or  the  degree  of  such  a  quality.  Hence  wage  statistics  are 
not  to  be  classed  under  the  value  unit,  where  they  appear  to 
belong.  They  are  attached  to  a  definite  object,  a  human  being, 
and  afford  knowledge  of  a  certain  produced  quality. 

It  is  probable  that,  as  time  goes  on,  this  kind  of  statistical  unit 
will  tend  to  improve  in  character,  quite  apart  from  any  statistical 
interest  in  such  improvement.  The  modem  tendency  towards 
standardization  of  instruments  and  products  is  of  increasing  im- 
portance as  markets  become  larger  and  productive  processes 
more  complex.  Staple  and  standardized  commodities  are  better 
suited  to  such  conditions.  Commercial  variations  in  a  given  com- 
modity that  are  not  dishonest  will  tend  to  be  fewer  because  the 
consumer  will  feel  himself  less  able  to  cope  with  complexities. 
Statisticians  and  administrative  officers  will  doubtless  discover 
and  apply  means  of  preventing  dishonest  variations  in  commer- 
cial units.  It  does  not  so  much  matter  what  the  imit  is,  provided 
it  be  fairly  constant.  That  matters  more  and  more,  in  practical 
ways  as  well  as  scientifically. 

There  are  units  which  are  intermediate  in  character  between 
the  first  and  second  orders.    Such  is  apparently  the  family.    In 


STATISTICAL  METHODS  37 

itself  natural  —  at  least  there  is  a  natural  family  —  so  many  of  its 
functions  and  traits  are  artificial  or  economic  that  the  United 
States  Census,  perforce,  defines  it  artificially.  Yet  inferences  as 
regards  the  natural  family  derived  from  such  statistics  are  not 
entirely  bad. 

The  city  also,  so  far  as  it  is  a  statistical  unit,  has  a  similar  inter- 
mediate character.  Inequality  of  size  would  not  be  an  objection 
to  its  use,  though  any  exploitation  of  such  figures  could  scarcely 
fail  to  take  account  of  this.  If  a  fully  natural  kind,  its  definition 
would  not,  of  course,  hinge  upon  corporate  geographical  bound- 
aries. But  cities  are  rather  too  few  in  number  for  the  "  trees  " 
to  lose  their  individuality  in  the  "  forest,"  hence  there  is  less  need 
of,  and  less  opportunity  for,  aggregate  or  statistical  treatment  of 
the  city  as  such. 

The  business  corporation  is  legally  and  in  some  other  respects 
analogous  to  the  city.  Here  there  is  certainly  a  "  forest."  There 
is  no  reason  why  we  should  not  have  true  statistics  of  corpora- 
tions. The  unit  is  not  perfect.  It  is  in  the  main  a  produced  unit, 
and  the  size  and  internal  organization  of  corporations  vary 
greatly.  It  is  not  entirely  a  produced  unit,  however,  since  it  is  a 
group  of  persons  and  has  most  of  the  qualities  of  the  individuals 
who  compose  and  direct  it. 

Whether  nationality  is  a  produced  quality  or  a  phase  of  a  natu- 
ral difference  in  kind  may  be  doubted.  It  is  a  border  case.  A 
Frenchman  may  be  of  Teutonic  stock,  but  he  is  French  if  his 
language,  culture,  and  traditional  sympathies  are  French.  The 
characteristic  element  in  statistics  of  immigration  is  usually 
nationality,  hence  such  statistics  are  more  of  the  second  order 
than  of  any  other. 

Statistics  of  manufactured  objects  are  gathered  mainly  by 
means  of  eniuneration  and  their  class  or  descriptive  name  will 
ordinarily  tell  much  about  them.  But  it  will  not  always  tell 
enough,  even  where  much  discrimination  is  exercised  in  determin- 
ing what  is  to  be  counted  and  even  when,  also,  the  classes  of 
objects  are  subdivided  in  the  count.  Hence  a  specially  significant 
unit,  one  that  is  indirectly  a  unit  of  capacity,  may  sometimes  be 
employed  as  a  basis  for  addition  and  comparison.    Thus  statistics 


38  BUSINESS  STATISTICS 

of  cotton-spinning  manufacture  take  as  their  unit  the  spindle. 
In  some  cases  odd  units  may  be  reduced  to  a  common  denomi- 
nator, as  in  the  case  of  the  standard  500  pound  bale  of  cotton- 
ginning  statistics. 

Sometimes  coimting  produced  objects  quite  fails  of  its  purpose 
and  resort  is  had  to  measurement.  Hence  statistics  of  capacity 
in  combination  with  niunber,  examples  being  the  tonnage  of  ships, 
the  capacity  of  grain  elevators  and  of  engines  for  power  produc- 
tion. This  case  is  transitional  to  the  next  class  of  statistics,  where 
the  unit  is  primarily  a  measure  of  size  or  capacity  instead  of  a  con- 
crete object.  Counting  by  size-classes  or  grades,  however,  may 
sometimes  be  preferable  to  measurement. 

Physical  Measurement  Units 

Physical  measurement  units  compose  the  third  kind  of  statis- 
tical unit.  Examples  of  physical  measurement  units  are  the 
ordinary  measures  of  length,  of  cubical  capacity,  and  of  weight, 
and  measures  of  energy  like  the  horse-power  and  the  kilowatt- 
hour. 

The  size  of  such  a  unit  is  the  result  of  accident  and  convention. 
The  length  of  the  foot  of  some  king  is  as  good  as  a  decimal  fraction 
of  the  miscalculated  circumference  of  the  earth.  The  horse-power 
may  as  well  have  a  merely  arbitrary  as  any  other  relation  to  the 
power  of  an  average  horse.  There  is  no  particular  reason  why  the 
yard  or  the  pound  should  count  for  one,  except  convention  and 
convenience.  There  should  be  some  common  and  familiar  stand- 
ard. What  it  is,  signifies  little.  Similarly  it  is  necessary  to  have 
a  rule  of  the  road,  but  whether  it  says  that  one  shall  turn  to  the 
right  or  to  the  left  does  not  matter.  That  the  unit  be  accepted  as 
standard  is  all  that  is  necessary.  There  is  a  marked  contrast  be- 
tween this  situation  and  the  way  in  which  the  statistical  unit  is 
determined  for  a  natural  kind.  There  we  find  nothing  arbitrary 
or  conventional. 

But,  though  the  fact  that  units  are  merely  conventional  does 
not  matter,  there  should  be  no  variability  or  ambiguity  in  the 
convention.  Our  abominable  English  weights  and  measures  in- 
clude several  different  kinds  of  pounds,  tons,  quarts.    Quantities 


STATISTICAL  METHODS  39 

reported  in  tons  are  only  presumptively  known  unless  the  unit 
is  described  every  time  it  is  given.  The  most  definite  schedules 
are  likely  to  be  filled  carelessly. 

Engineers  have  been  too  ready  to  accept  a  situation  as  regards 
their  peculiar  technical  terms  which  is  not  much  better.  Statis- 
tics of  rated  capacity  of  power  equipment  suffer  considerably 
from  lack  of  standardization.  But  the  engineering  societies  are 
now  attending  to  such  matters.  Mention  may  be  made  especially 
of  the  American  Institute  of  Electrical  Engineers.  The  work  of 
the  National  Bureau  of  Standards  insures  steady  improvement 
in  metrology  generally. 

The  very  fact  that  the  unit  is  a  measure  more  or  less  arbitrarily 
arrived  at,  and  incidentally  become  customary  or  standard,  sug- 
gests its  limitations.  Measuring  ignores  individuality  and  disre- 
gards all  but  one  of  the  quahties  of  the  objects  measured.  In 
statistics  of  the  third  order  we  no  longer  coimt  the  members  of  a 
kind  and  in  naming  also  describe  them.  The  significant  relations 
of  a  measurement  unit  to  things  in  general  must,  of  necessity,  be 
narrow  because  unilateral.  They  take  account  of  only  one  thing 
at  a  time.  A  particular  steam  engine  has  a  determinate  relation 
to  the  men  who  run  it  and  to  the  machines  for  which  it  furnishes 
power,  but  "  ten  horse-power  "  has  no  such  relation  to  other 
things.  It  tells  something  about  an  engine,  but  does  not  mean  the 
same  for  a  ten  horse-power  engine  as  for  one  of  a  hundred  horse- 
power. It  is  more  important  to  know  the  niunber  of  engines  and 
their  size  (by  classes)  than  their  aggregate  power.  But  we  some- 
times have  to  be  content  with  horse-power  alone. 

Measurements  always  involve  abstraction.  A  measurement 
gives  length,  or  cubical  contents,  or  specific  gravity,  any  one  of 
which  abstracts  from  all  but  a  single  quality  or  relation.  Diverse 
measurements  may  give  several  such  facts  about  a  series  of  ob- 
jects, but  the  results  are  still  abstract.  If  we  are  to  learn  about 
the  real  concrete  things  it  must  be  by  way  of  supplementary 
or  collateral  information,  not  always  statistical  in  character. 
Capacity  may  be  measured,  disregarding  shape;  weight,  disre- 
garding material ;  the  figures  thus  limit  themselves.  The  counting 
of  discrete  natural  objects,  on  the  other  hand,  gives  numerical 


40  BUSINESS  STATISTICS 

knowledge  which  can  be  supplemented  to  any  desired  extent  by 
reference  to  natural  qualities. 

When  objects  are  both  measured  and  cotmted,  which  is  to  be 
regarded  as  the  primary  datum  ?  On  the  whole  the  counted 
object  should  be  primary  because  of  its  superior  character  as  a 
unit,  though  the  greater  importance  of  the  measurement  unit  may 
sometimes  outweigh  this  consideration.  It  is  well,  whenever 
possible,  to  have  both  sorts  of  quantity  and  also  to  have  the  two 
clearly  related,  i.  e.,  the  mmibers  by  sizes  or  by  size-classes. 

Sometimes  what  appears  to  be  measurement  is  in  effect  only  a 
quicker  way  of  coimting.  It  may  be  more  convenient  to  deter- 
mine the  number  of  new  coins  in  a  package  by  weight  than  by 
tale.  But  the  result  is  not  less  a  number  of  coins.  Commodities 
are  often  weighed  merely  because  this  is  the  best  way  to  arrive 
at  their  amount.  Bushels  are  used  to  measure  grain.  The  object 
so  measured  is  a  natural  kind  composed  of  individual  things.  Re- 
lations to  other  things,  for  example  to  nutritive  value  and  tasti- 
ness,  are  not  at  all  left  out  of  account.  In  these  cases  measures 
are  not  resorted  to  because  of  diversity  of  type  and  of  size  among 
the  objects,  as  in  the  case  of  produced  articles  such  as  generating 
engines.  Natural  kinds  seldom  require  this,  even  where  we  are 
directly  interested  in  their  size,  for  they  vary  regularly  about  a 
representative  mean.  But  the  size  of  some  marketable  products 
is  so  largely  produced  that  it  has  almost  ceased  to  be  a  natural 
property  of  the  kind;  hence,  there  is  a  tendency  to  determine 
quantities  of  such  things  by  weight,  even  when  the  article  is  sold 
in  its  natural  state.  If  it  is  becoming  true,  however,  that  eggs 
should  be  sold  by  weight  instead  of  by  count,  this  is  chiefly  be- 
cause of  the  work  of  the  breeder  in  developing  marked  varieties 
of  the  domestic  fowl.  The  size  of  the  egg  is  coming  to  depend  on 
the  breeder's  art. 

Measurement  aggregates  may  consist  of  one  continuous  quan- 
tity or  a  homogeneous  mass,  or  they  may  relate  to  a  miscellaneous 
lot  of  individual  things  which  are  varying  multiples  of  the  meas- 
urement unit.  The  latter  case  seems  to  be  the  more  frequent  in 
statistics,  perhaps  because  the  more  evolved  and  individualized 
tilings,  whether  made  such  by  nature  or  by  man,  that  is  whether 


STATISTICAL  METHODS  4I 

biological  species  or  manufactured  articles,  are  of  more  interest 
to  us.  But  it  is  probably  with  the  former  class  of  materials  that 
measurement  begins,  later  extending  to  objects  that  might  also 
be  counted.  The  homogeneous  material  may,  of  course,  be  a 
natural  kind,  but  not  of  the  most  interesting  order.  So  far  as  it  is 
such,  a  measured  amount  of  it,  of  water  or  sand,  for  example,  may 
have  some  of  the  advantages  of  the  first  order  of  unit —  some  only, 
however,  because  such  unintegrated  matter  too  readily  mixes  and 
mingles  with  other  things. 

Accuracy  of  measurement  deserves  notice  in  this  connection 
by  way  of  distinction  from  accuracy  of  counting,  and  also  for 
comparison  with  it.  The  definition  of  the  measurement  unit  offers 
practically  no  difficulties.  The  number  of  units  to  be  recorded 
usually  involves  some  mathematical  computation  upon  the  basis 
of  comparison  with  a  standard  measure,  or  it  may  be  obtained  by 
estimation  upon  a  more  or  less  objective  basis.  There  is  not  so 
much  difference  between  measuring  and  objectively  estimating 
quantities  as  one  might  easily  assume.  The  view  of  an  expert 
with  the  time  and  facilities  for  applying  objective  tests  to  check 
his  results  is  worth  much  more  here  than  it  is  in  the  field  of 
counted  units.  The  method  of  sampling  can,  in  this  case,  if  in- 
teUigently  used,  be  adequate  for  most  statistical  purposes.  The 
way  in  which  several  measurements  are  employed  to  check  each 
other  by  the  physicist  and  mathematician,  and  are  assumed  to  be 
inevitably  more  or  less  approximate,  illustrates  the  necessary  in- 
exactness of  human  measurement  and  also  suggests  that "  mathe- 
matical exactness  "  may  often  be  practically  unimportant  as  well 
as  imattainable.  If  we  dealt  with  the  objectively  checked  esti- 
mates of  impartial  experts  as  the  mathematical  physicist  deals  with 
quantitative  observations,  we  might  find  them  very  nearly  as  good 
for  most  of  the  purposes  of  statistics  as  "  exact "  measurements. 

It  sometimes  happens  that  the  reduction  of  odd  articles  to  a 
common  measurement  standard  is  desirable.  Provided  the  ma- 
terial contained  is  homogeneous,  little  is  lost.  But  caution  in  the 
use  of  this  short-cut  is  imperative.  The  day's  work,  for  example, 
is  not  merely  so  many  hours  of  work.  A  16-hour  day  is  by  no 
means  equal  to  two  8-hour  days;  nor  is  a  48-hours-a-week  sched- 


42  BUSINESS  STATISTICS 

ule  the  same  regardless  of  how  or  when  the  time  is  put  in.  Some- 
times administrative  regard  for  facility  of  enumeration  may- 
cause  a  too  easy  acceptance  of  the  measurement  unit  in  such 
cases,  when  varieties  and  their  relative  importance  are  quite  as 
interesting  as  totals  and  averages. 

Some  statistical  units  in  common  use  are  compound.  This  is 
especially  true  of  units  of  physical  capacity  and  performance, 
that  is,  of  such  as  have  the  characteristics  of  our  third  class.  Such 
a  unit  usually  takes  up  whatever  disadvantages  pertain  to  both 
its  terms.  The  foot-pound  is  only  apparently  such ;  its  compound 
name  resulting  from  the  attempt  to  make  concrete  an  abstract 
conception.  Foot-pounds  per  hour  is  truly  compound;  hence 
horse-power  is  compound.  The  car-mile  and  car-hour  are  com- 
pound. The  vagueness  that  attaches  to  these  units  follows  from 
the  character  of  the  basic  unit,  which  is  of  the  second  class.  It  is 
important  to  know  the  size  of  the  car  and  whether  trailers  are 
used.  But  the  grade  and  curvature  of  the  road  also  affect  the  sig- 
nificance of  such  a  unit.  If  the  idea  is  to  measure  the  potential 
service  performed  by  a  passenger  car,  the  seat-mile  is  more  to  the 
purpose.  One  term  of  this  unit  is  of  the  first  order.  The  ton- 
mile  unit  is  of  the  third  order  as  regards  both  its  terms.  But 
data  for  ton  mileage  and  seat  mileage  do  not  make  it  possible  to 
dispense  with  car  mileage. 

Comparability  is  the  fundamental  desideratum  of  statistical 
data.  There  is  no  difficulty  about  it  with  natural  kinds.  There 
is  a  good  deal  with  produced  objects.  The  difficulty  is  apparently 
met  by  the  use  of  measurement  units,  but  the  solution  is  often  ap- 
parent only.  The  additive  quality  is  secured,  but  perhaps  at  the 
cost  of  losing  trace  of  important  relations  to  other  things.  Hence 
measurement  as  a  means  of  obtaining  a  total  aggregate  amount  is 
to  be  considered  a  supplement  to,  not  a  substitute  for,  counting, 
whenever  the  quantities  dealt  with  are  composed  of  discrete  natu- 
ral objects. 

The  Pecuniary  Unit 

The  fourth  order  of  statistical  unit  is  the  unit  of  commercial 
value.  It  is  possible  that  some  other  than  the  monetary  measure 
might  be  found  that  could  serve  as  a  basis  for  value  statistics.    In 


STATISTICAL  METHODS  43 

fact,  however,  the  only  sort  of  unit  we  use  is  something  reducible 
to  the  dollar.  Whether  any  and  all  statistics  of  this  fourth  class 
should  be  called  financial,  or  financial  and  commercial,  as  seems 
to  be  the  tendency,  is  questionable.  But  financial  statistics  are 
representative  of  the  class. 

One  reason  why  the  pecuniary  unit  bulks  so  large  in  common 
statistics,  including  business  statistics,  is  because  it  is  the  most 
universal  of  common  denominators.  There  is  not  much  of  practi- 
cal interest  in  the  world  that  does  not,  at  least  occasionally,  have 
a  pecuniary  value  assigned  to  it.  Nor  is  the  tendency  to  attribute 
to  all  things  a  pecuniary  value  so  reprehensible  as  is  often  alleged. 
The  error,  which  is  a  moral  as  well  as  intellectual  error,  consists 
not  in  the  extended  application  of  the  pecuniary  measure,  but  in 
supposing  that  it  has  an  intensiveness,  comprehensiveness  and 
independence  of  meaning  which  is  foreign  to  its  nature.  Just  be- 
cause of  the  general  applicability  of  the  dollar  as  a  common  de- 
nominator, its  definable  content  and  meaning  must  be  small.  All 
measurement  units  suffer  by  reason  of  their  abstractness.  The 
most  universal  of  common  denominators,  despite  its  fundamental 
interest  for  every  human  being  living  in  an  exchange  economy, 
will  naturally  suffer  most  in  this  way. 

In  citing  examples  of  the  fourth  order  of  statistics  we  can 
hardly  refrain  from  commenting  on  their  quality.  Statistical 
inferiority  is  characteristic  of  numerical  data  based  upon  the 
pecuniary  unit.  A  review  of  examples  of  such  statistics  becomes 
a  process  of  learning  why  this  is  so.  Hence  this  judgment  may 
as  well  be  put  at  the  front  of  this  section.  It  applies  with  full 
force,  however,  only  when  the  pecuniary  unit  is  used  by  itself 
and  as  standing  on  its  own  bottom. 

Financial  reports  are  the  sources  of  most  pecuniary  statistics. 
Our  statistics  of  railways,  in  the  main  pecuniary,  are  among  the 
best  examples  of  the  class.  An  authoritatively  prescribed  uni- 
form system  of  accounts  will  make  them  vastly  better  than  they 
were  before.  Statistics  of  assessed  valuation  and  of  taxation  are 
a  less  developed  variety  of  the  fourth  order.  But,  if  we  wish  to 
prove  that  we  are  economically  better  off  than  were  our  fore- 
fathers a  hundred  years  ago,  it  would  be  sounder  to  argue  less 


44  BUSINESS  STATISTICS 

from  the  increase  in  per  capita  wealth  than  from  the  application  of 
invention  to  promote  abundance  and  variety  of  goods.  Statistics 
of  export  and  import  trade  are  almost  altogether  pecuniary  as  to 
their  unit,  largely  because  of  a  possibly  too  great  regard  for  ad- 
ministrative convenience.  Hence  it  is  easy  not  to  determine  just 
what  is  the  status  and  recent  tendency  of  British  trade  or  just 
what  our  own  trade  balance  signifies.  Aside  from  disturbing  fac- 
tors peculiar  to  international  trade,  the  level  of  prices  changes 
with  time  and  place  and  with  it  the  meaning  of  the  pecuniary 
unit.  Finally,  our  statistics  of  capital  and  capitalization  are  most 
completely  pecuniary.  Despite  great  practical  interest  in  them, 
all  such  data  are,  as  compared  with  demographic  statistics,  scien- 
tifically barren.  The  almost  exclusively  practical  interest  of  their 
compilation  is  no  sufficient  explanation.  On  the  contrary,  this 
should  provide  richer  and  better  material  for  analysis  by  the 
scientifically  disposed. 

One  reason  why  pecuniary  statistics  are  so  generally  unreliable 
as  to  their  comparability,  and  therefore  as  to  their  significance, 
is  because  they  are  usually  derived  from  books  of  account.  Ac- 
counting theories  and  practices  are  anything  but  uniform  as  re- 
gards their  treatment  of  particular  items.  Indeed,  less  elasticity 
of  method  and  usage  would  often  serve  less  well  the  purposes  of 
business  men.  Accountants,  for  their  lack  of  breadth  of  view, 
deserve  part  of  the  blame.  But  the  public  interest  in  the  intelli- 
gibility of  financial  statements  is  gradually  estabhshing  authori- 
ties to  prescribe  and  compel  uniformity  in  such  matters.  Until 
uniform  systems  of  accounts  have  been  in  effect  long  enough  to 
insure  their  smooth  and  accurate  working,  our  financial  compila- 
tions will  fall  much  short  of  being  entitled  to  the  standing  that 
should  be  connoted  by  the  name  statistics.  Accounting  entries 
ought  to  have  constant  significance  and  comparability.  The  mere 
accountant  has  been  too  much  inclined  to  make  his  own  financial 
balances  the  ne  plus  ultra  of  his  work. 

The  investor  is  likely  to  form  his  opinion  of  a  stock  on  the  basis 
of  what  it  pays  in  dividends.  But  if  he  is  alert  he  will  consider 
rather  the  net  income  earned  from  year  to  year.  Though  much 
speculation  has  just  so  superficial  a  basis,  a  dealer  in  stocks  will 


STATISTICAL  METHODS  45 

go  deeper.  The  investment  expert  of  a  broker  or  banker  will  go  as 
far  into  a  company's  reports  as  there  are  data.  He  will,  if  possible, 
analyze  the  physical  statistics.  That  he  does  not  give  more  at- 
tention to  such  matters  may  be  explained  by  the  usual  absence  of 
the  necessary  information.  Even  the  expert,  however,  is  likely 
to  give  the  investor  chiefly  the  tabulations  of  gross  and  net  income 
to  which  he  is  accustomed  rather  than  educate  him  up  to  some 
understanding  of  the  physical  basis  of  profits. 

If  profits  are  really  there,  the  basis  is  physical  as  well  as  eco- 
nomic. But  the  basis  of  net  income  as  it  stands  in  a  company's 
report  may  be  neither  physical  nor  economic.  With  accounting 
methods  not  yet  fixed  and  with  the  management  unchecked  by 
statistical  indices  of  physical  condition,  it  is  quite  possible,  es- 
pecially through  maintenance  accounts,  to  juggle  with  net  income 
in  ways  that  no  superficial  analysis  will  disclose.  Depreciation 
can  be  charged  only  on  an  accrued  or  estimated  basis  and  we  have 
as  yet  no  sufl&cient  experience  to  check  the  basis,  though  we  have 
had  plenty  of  experience  of  the  arbitrariness  and  manipulation  of 
maintenance  charges.  All  this  relates  to  property  operated.  In- 
tercorporate relations  and  resulting  elusive  "  other  income  "  offer 
another  handle  for  manipulation.  The  line  between  capital 
expenditures  and  operating  expenses  is  in  its  nature  indefinite. 
That  between  expenses  of  the  period  and  of  other  periods  (or 
years)  is  equally  so,  especially  on  account  of  depreciation.  Hence 
the  necessity  of  honesty  and  —  as  a  guaranty  of  honesty  and 
competence  —  full  data  to  enable  the  outsider  to  form  an  opinion. 
"  Accrued  "  income  may  often  be  more  properly  described  as  con- 
tingent. Hence  the  "  actually  paid  "  basis  of  the  federal  corpo- 
ration tax.  The  government  can  wait  for  the  long  run.  But  the 
outside  investor  may  be  "  cleaned  out  "  long  before  the  consum- 
mation of  long-term  changes  whose  probable  effect  he  is  not 
permitted  to  see. 

Merely  financial  reports  are  not  adequate  to  the  use  to  be  made 
of  them.  It  is  of  the  essence  of  accounts  that  they  cannot  be  so. 
"  Net  income  "  is  as  much  a  result  of  how  the  books  are  kept  as 
of  profitable  business  transactions.  It  should  not  by  itself  be  the 
test  of  solvency  but  should  be  supplemented  by  full  operating  and 
physical  statistics. 


46  BUSINESS  STATISTICS 

The  inferiority  of  the  fourth  order  of  statistics,  however,  is  due 
to  more  fundamental  causes  than  arbitrariness  of  accounting 
practice.  The  dollar  is  intrinsically  inferior  as  a  statistical  unit. 
The  physical  measurement  unit  as  well  as  the  pecuniary  unit  is 
the  expression  of  a  relation  and  not  discrete;  but  the  former  can 
easily  be  so  conceived  while  the  latter  cannot.  The  dollar  unit  is 
so  completely  abstract  as  to  be  not  even  imaginable.  It  is  a  meas- 
ure of  *'  power  in  exchange."  But  the  dollar's  power  in  exchange 
does  not  mean  the  same  thing  to  any  two  persons.  Even  if  sub- 
jected to  the  test  of  actual  exchange  and  determined  by  market 
conditions  the  purchasing  power  of  a  dollar  fluctuates,  hence  esti- 
mation must  be  resorted  to  and  allowance  made  for  time  and 
place.  Even  then  much  depends  on  "  whose  ox  is  gored."  Finan- 
cial data  usually  have  the  character  of  interested  estimates.  Dif- 
ferences in  valuation  are  not  mere  variations  around  a  mean  and 
are  not  moderate.  Hence  they  are  not  easily  dealt  with  or  lightly 
to  be  disregarded.  Reducing  to  a  fine  gold  equivalent  is  merely  a 
way  of  getting  around  diversity  of  currency.  Changes  in  rates  of 
exchange  are  a  minor  adjustment,  for  custom  and  "  psychology  " 
are  factors  in  price.  The  symbol  is  familiar  and  constant.  That 
for  which  it  stands  changes  in  ways  not  easily  determinable,  cer- 
tainly not  to  be  simply  ignored. 

The  method  of  index  nmnbers  —  itself  a  nice  problem  in  sta- 
tistics —  largely  meets  such  difficulties  with  the  value  unit  as  are 
due  to  changes  in  time.  Logically,  however,  the  index  should 
change  with  every  purpose  for  which  statistics  of  the  fourth  order 
are  used.  The  proportionate  weights  of  the  prices  of  particular 
articles  which  are  determined  by  the  consumption  of  wage- 
earners  in  a  manufacturing  community  seem  to  be  of  greatest 
use.  But  they  are  not  therefore  generally  adapted  to  all  pur- 
poses, even  though  adjustment  of  the  weights  cannot  be  alleged 
to  be  indispensable. 

The  financial  statistics  showered  upon  us  do  not  have  the  defi- 
niteness  of  meaning  that  statistics  may  be  expected  to  and  ought 
to  have.  Efforts  should  be  made  to  close  the  existing  great  gap 
in  scientific  character  between  financial  and  demographic  statis- 
tics.  For  taxation  and  financial  administration  and  for  the  public 


STATISTICAL  METHODS  47 

control  of  corporate  management,  adequate  statistical  data  will 
become  more  and  more  necessary.  This  refers  to  the  need  of 
governmental  action.  Purely  private  interests  (if  there  be  such) 
are  also  involved.  Many  large  corporations  are  coming  to  feel 
that  they  ought  to  make  the  knowledge  of  their  operations  ac- 
cessible to  the  public,  at  least  to  their  actual  and  possible  stock- 
holders. The  statistician  thus  tends  to  be  a  necessary  aid  in  the 
conduct  of  every  large  corporate  enterprise. 

A  suggestion  of  the  direction  which  improvement  will  take  is 
contained  in  the  rather  obvious  proposition  that  economic  and 
pecuniary  statistics  are  not  necessarily  the  same.  The  backward 
state  of  economic  statistics,  as  compared  with  demographic,  is 
doubtless  largely  due  to  a  too  ready  acceptance  of  figures  of  value 
as  a  satisfactory  answer  to  economic  questions.  But  economic 
statistics  need  not  be  so  superficial.  They  will,  when  fairly  com- 
plete, doubtless  contain  values,  but  will  not  be  composed  of  them. 
Statistics  of  manufactures  and  trade  ought  to  present  quantities 
and  kinds  of  products  as  well  as  values  or  prices.  Our  agricul- 
tural statisticians  do  this  very  largely,  though  they  too  sometimes 
seem  to  prefer  to  detach  the  values  from  all  other  numbers  relat- 
ing to  their  data.  Even  where  the  interest  is  purely  conmiercial  or 
financial  the  trend  is  towards  more  adequate  figures.  We  are 
told  of  tons  of  rails  produced  as  well  as  of  the  value  of  the  output. 
It  would  be  still  better  to  have  the  kinds  specified,  i.  e.,  the  weight 
per  yard  and  the  material,  perhaps  also  the  shape,  —  things 
which,  it  should  be  observed,  are  seldom  necessary  in  statistics  of 
natural  kinds.  Our  numerous  practical  "  statistical  "  manuals 
designed  for  investors  need  to  pay  more  attention  to  such  possi- 
bilities. But  the  large  corporation  must  first  appreciate  the  im- 
portance of  compiling  and  making  public  more  adequate  data. 

Index  numbers  have  been  referred  to  above  as  affording  a  way 
out  of  some  of  the  difficulties  of  statistics  resting  upon  the 
pecuniary  unit.  This  is  a  way  to  get  beyond  pecuniary  value 
and  down  to  concrete  goods.  We  may  thus  learn  what  the  dollar 
means  in  terms  of  necessary  articles  of  consumption.  The  device 
is  practically  the  determination  of  an  equation  between  money 
and  commodities.  The  principle  of  this  solution  ought  to  be  more 
generally  applied. 


48  BUSINESS  STATISTICS 

A  Way  to  Better  Statistical  Material,  especially 
to  Better  Economic  Statistics 

While  it  is  of  some  scientific  interest  to  distinguish  different 
orders  of  statistical  units  and  of  statistics,  what  the  distinction  is 
really  worth  depends  upon  what  purposes  it  may  serve.  For  sta- 
tistical practice  the  important  question  is:  How  can  the  inferior 
orders  of  statistics  be  improved  ? 

Statistics  first  achieved  scientific  standing  in  the  field  of  vital 
statistics  and  demography,  that  is,  in  a  general  way,  among  natu- 
ral kinds.  Whether  as  an  extension  of  the  viewpomt  of  "  politi- 
cal arithmetic  "  or  as  an  intensive  development,  statistics  that 
are  something  more  than  mere  numbers  have  come  rather  later 
in  other  fields.  Among  the  divisions  of  our  federal  census  the 
volumes  on  population  are,  as  statistics,  the  best;  those  on  agri- 
culture (the  units  here  also  being  chiefly  natural  kinds)  rank  next; 
and  last  or  lowest  in  quality  are  the  statistics  of  manufactures, 
the  reason  being  that  the  unit  is  too  largely  pecuniary.^  One 
might  well  infer  that  our  statistics  of  manufactures  should  be 
made  less  dependent  on  the  pecuniary  unit.  This  is  not  meant  to 
imply  that  our  census  oflEicials  are  unaware  of  the  need. 

The  way  to  improve  pecuniary  statistics  is  to  relate  values  and 
prices,  present  and  past,  to  the  things  to  which  they  pertain,  or 
rather  to  the  statistics  of  those  things.  Pecuniary  statistics 
should  be,  so  far  as  possible,  either  accessory  to  or  supported  by 
statistics  of  higher  orders.  An  amount  paid  in  wages  immediately 
provokes  a  question  as  to  the  number  and  kind  of  wage-earners, 
how  long  they  worked,  and  whether  on  full  time  or  part  time. 
It  is  not  enough  to  know  the  value  of  our  exports  of  a  particular 
class  of  commodities,  though  the  difficulty  of  defining  varieties 
does  in  part  excuse  the  shortcoming.  Railroads  want  to  know  the 
relation  of  expenditures  to  work  done,  hence  ratios  of  cost  and  of 
traffic  to  various  operating  units,  expenses  and  revenues  per  train- 
mile,  ton-mile,  etc.    New  uses  of  such  units  and  ratios  are  con- 

^  The  defects  of  the  volumes  on  vital  statistics  —  the  statistics  obtained  by 
enumeration  as  distinguished  from  the  recent  compilations  of  mortality  registration 
records  —  do  not  vitiate  the  comparison  because  their  condition  is  due  mainly  to 
accident  in  the  development  of  our  statistical  administration. 


STATISTICAL  METHODS 


49 


stantly  appearing.  Detailed  power  and  wage  statistics  serve  the 
same  purpose  and  will  soon  be  considered  a  necessary  part  of  the 
classified  and  analyzed  records  of  any  large  private  corporation. 
It  is  a  need  of  our  mental  nature  that  values  be  predicated  of 
definite  things.  As  the  workings  of  our  minds  are  pragmatic, 
this  need  points  to  a  function. 

Especially  statistics  of  capitalization  need  to  be  related  to  the 
statistics  of  capital  or  of  the  means  of  production  upon  the  basis 
of  which  securities  are  issued.  This  happens  to  be  a  degree  re- 
moved from  the  direct  interest  of  active  business  men,  hence 
"  neglect ''  does  not  su£&ciently  describe  their  attitude  in  the  mat- 
ter. Some  of  the  uses  to  which  physical  valuation  might  be  put 
may  reasonably  be  objected  to,  but  to  the  thing  itself  there  is  no 
valid  objection.  The  investor  should  be  put  in  position  to  know 
his  property.  The  only  way  in  which  such  knowledge  can  be  con- 
veyed to  his  understanding  in  the  case  of  a  large  corporation  is  by 
statistical  description.  This  is  the  foundation  and  essence  of 
physical  valuation.  A  corporation  cannot  properly  have  secrets. 
Especially  in  relation  to  its  stockholders,  its  duty  is  not  merely 
the  negative  one  of  abstaining  from  withholding  information. 
Even  if  the  corporate  net  income  be  the  basis  upon  which  the  in- 
vestor buys  the  stock,  its  stability  as  well  as  its  amount  is  impor- 
tant and  the  probable  stability  of  the  income  depends  chiefly 
upon  an  adequate  physical  basis. 

Economists  of  a  certain  tendency  share  with  business  men  the 
blame  for  inadequate  notions  of  how  financial  statistics  ought  to 
be  looked  upon,  at  least  as  regards  the  phase  of  them  that  relates 
to  capitalization.  The  capital  value  concept  is  useful  and  impor- 
tant. The  attempt  to  wash  out  the  distinction  between  capital 
as  a  sum  of  value  and  capital  as  concrete  means  of  production,  or 
what  amounts  to  this,  to  ignore  the  latter  meaning,  is  very  much 
the  opposite  of  useful.  The  dominance  of  the  corporate  form  of 
organization  makes  it  important  not  to  destroy,  but  to  develop 
the  idea  of  capital  as  concrete  means  of  production.  The  small 
individual  entrepreneur  does  not  know  less  of  what  he  possesses 
by  reason  of  the  fact  that  he  reduces  all  to  terms  of  value  as  a 
common  denominator.    The  stockholder  of  a  large  corporation  is 


so  BUSINESS  STATISTICS 

differently  situated.  He  can  know  what  he  possesses  and  how  it 
is  being  used  only  by  means  of  adequate  physical  and  operating 
statistics,  including  data  of  performance,  duly  reported  to  him. 
Mere  balance-sheet  and  income  statements  are  not  sufficient. 
Here  is  where  the  capital-value  theorists  may  have  occasioned 
some  distraction  of  attention  from  real  needs.  With  adequate 
inventories  of  extant  properties,  capital  assets  could  not  be  made 
to  include  dead  horses,  tracks  removed,  obsolete  and  unused 
implements,  all  and  sundry  covered  by  combination  and  by 
temporary  monopoly  or  other  advantage,  without  security  for  the 
continuance  of  such  advantage  and  thus  with  loss  to  the  investor. 
Uniform  accounting  systems  should  largely  take  care  of  this  need 
as  well  as  of  the  proper  treatment  of  accounts  in  the  customary 
narrower  sense,  as  distinguished  from  records. 

Accounts  should,  in  general,  be  supplemented  by  records  or 
statistics,  though  the  word  so  used  sounds  pretentious.  The  inven- 
tory made  once  a  year,  or  of  tener  in  the  case  of  a  mercantile  stock, 
should  not  be  dispensed  with  in  the  case  of  fixed  capital.  Though 
it  need  not  be  made  so  often,  we  know  that  fixed  capital  also  may 
disappear  in  ways  not  accounted  for.  Corporations  have  their 
"  storekeepers  "  who  carefully  check  and  record  whatever  ma- 
terials and  supplies  they  receive  and  issue.  Should  not  there  be 
records  also  of  the  more  valuable  tangible  assets  ?  As  statistics 
constitute  the  state's  means  of  knowing  itself,  so  the  only  avail- 
able means  by  which  a  large  corporation  can  know  itself  are  like- 
wise statistics,  both  physical  or  static  statistics  and  operating 
statistics.  So  far  as  size  is  the  compelling  factor,  there  are  njodem 
business  corporations  quite  as  large  as  were  important  states 
when  statistics  first  began  to  be. 

So-called  cost  accounting,  or  cost  keeping,  occupies  much  the 
same  position  in  relation  to  operating  statistics  as  does  physical 
valuation  in  relation  to  the  knowledge  and  quantitative  estima- 
tion of  fixed  investment.  It  is  an  attempt  to  show  the  connection 
between  fundamental  physical  facts  —  quantity  and  kinds  of  raw 
materials,  labor  time  of  various  sorts,  space  and  power  required  — 
and  the  quantity  and  value  of  products.  It  is  essentially  statis- 
tics rather  than  accounting,  since  in  it  numerical  comparisons  are 


STATISTICAL  METHODS  5 1 

more  important  than  the  registering  and  balancing  of  pecuniary 
obligations.  The  development  of  cost  keeping  in  the  business 
world  is  a  phase  of  the  increasing  importance  of  statistics. 

Any  considerable  acquaintance  with  compilations  of  numbers 
in  tabular  form  should  make  it  clear  that  not  all  figures  are  sta- 
tistics, nor  all  figurers  statisticians.  Economists  without  special 
statistical  interest  or  training  have  probably  contributed  to  the 
general  misconception  of  statistics  as  merely  masses  of  figures. 
The  large  corporation  is  now  coming  to  feel  it  desirable  to  have  a 
statistician,  though  he  is  still  likely  to  be  regarded  as  a  special  kind 
of  clerk,  one  who  is  "  quick  at  figures."  Sometime  it  will  be  recog- 
nized that  neither  an  accountant's  nor  an  engineer's  training 
specially  qualifies  for  statistical  work.  The  statistician  should  be 
grounded  in  demography  and  familiar  with  the  statistical  meth- 
ods used  in  dealing  with  natural  kinds,  no  matter  how  "  practi- 
cal "  his  later  work  is  to  be.  It  is  true  also  that  he  cannot  have 
too  realistic  a  knowledge  of  his  special  field.  The  differentiation 
between  the  accountant  and  the  statistician  will  probably  come  to 
mean  that  the  latter  is  specially  competent  to  deal  with  physical 
things  in  their  mmierical  and  quantitative  aspects  by  means  of 
methods  suggested  by  a  study  of  the  higher  orders  of  statistics. 

Figures  are  symbols.  They  serve  only  to  connect  our  thoughts 
with  things.  Not  all  statistics  do  this  with  equal  directness  and 
sureness.  It  holds  especially  of  figures  based  upon  the  commercial 
unit  of  value  that  the  meaning  is  not  self-evident.  The  measure 
of  value  is  less  intelligible  than  physical  measures.  Statistics 
based  upon  measurement  imits  are,  in  general,  less  good  than 
counts,  whenever  the  kinds  counted  are  adequately  classed  and  of 
well-defined  character.  Realistic  comprehension  is  scarcely  possi- 
ble with  value  measures  unless  they  are  definitely  related  to 
things.  Things  valued  should  be  also  defined  and  counted,  or  at 
least  physically  measured.  The  statistician  must  see  the  quan- 
titative relations  of  the  numbered  things,  not  the  mere  symbols 
or  numbers.  As  statistics  becomes  of  greater  recognized  impor- 
tance and  as  its  methods  are  applied  to  more  and  more  branches 
of  knowledge  —  being  thus  of  doubly  increased  significance  — 
the  greater  will  be  the  need  to  attend  to  such  considerations  as 


52  BUSINESS  STATISTICS 

are  mentioned  in  this  paper.  We  shall  supplement  statistics  of 
produced  kinds  with  measurements,  instead  of  beginning  and  so 
largely  ending  with  the  most  abstract  of  measurement  units,  thus 
getting  the  cart  before  the  horse.  Without  implying  that  the 
other  orders  cannot  sometimes  be  helped  by  extending  quan- 
titative enumerations  and  analyses  to  cover  value,  it  is  clear 
that  the  latter  kind  of  statistics  has  much  less  to  give  than  to 
receive. 

To  say  that  pecuniary  statistics  are  less  good  than  pecuniary 
statistics  plus  other  kinds  of  related  figures  supporting  them,  is 
an  afi&rmation  of  the  obvious.  Yet  this  fact  needs  emphasis. 
Pecuniary  statistics  greatly  need  such  support.  Nor  is  it  quite 
true  that  the  rule  works  equally  well  the  other  way.  The  pecu- 
niary unit  is  the  weak  member  which  ought  as  little  as  possible  to 
be  left  to  stand  alone.  Stated  values  are  seldom  disinterested  and 
their  basis  is  never  quite  objective.  We  need  always  to  know 
kinds  and  grades  and  their  numbers  or  quantities,  along  with 
values.  The  foundation  of  all  statistics  should  be  in  natural  kinds 
or  in  the  best  obtainable  substitutes  for  them. 

III.  _Jndex  Numbers  ^^ \ 

By  ^^SJEiLC^ITCHELL 

The  Relations  Between  Methods  and  Uses 

The  first  step,  framing  a  clear  idea  of  the  ultimate  use  of  the 
results,  is  most  important,  since  it  affords  the  clue  to  guide  the 
compiler  through  the  labyrinth  of  subsequent  choices.  It  is, 
however,  the  step  most  frequently  omitted. 

When  the  end  in  view  is  specific  and  capable  of  precise  state- 
ment the  problem  of  choosing  methods  is  comparatively  simple. 
Straightforward  logic  then  determines  what  commodities  should 
be  included,  what  sources  of  quotations  should  be  drawn  upon, 
and  how  the  original  data  should  be  worked  up  to  give  the  most 
significant  results.   Puzzles  a-plenty  are  left,  but  most  of  them  are 

1  "  Index  Numbers  of  Wholesale  Prices  in  the  United  States  and  Foreign  Coun- 
tries," Btdletin  of  the  United  States  Bureau  of  Labor  Statistics,  No.  173,  pp.  25-78, 
109-1 II.  Reprinted  by  permission  of  the  United  States  Bureau  of  Labor  Statistics. 
In  this  reprint  several  footnotes,  charts  and  tables  have  been  omitted.     [Editor.] 


STATISTICAL  METHODS  53 

limited  to  finding  the  best  compromise  between  what  logic  marks 
out  as  desirable  and  what  is  feasible  in  view  of  the  time  and  money 
at  the  investigator's  disposal. 

Few  of  the  widely-used  index  numbers,  however,  are  made  to 
serve  one  special  purpose.  On  the  contrary,  most  of  them  are 
"  general-purpose  "  series,  designed  with  no  aim  more  definite 
than  that  of  measuring  changes  in  the  price  level.  Once  published 
they  are  used  for  many  ends  —  to  show  the  depreciation  of  gold, 
the  rise  in  the  cost  of  living,  the  alternations  of  business  prosperity 
and  depression,  and  the  allowance  to  be  made  for  changed  prices 
in  comparing  estimates  of  national  wealth  or  private  income  at 
different  times.  They  are  cited  to  prove  that  wages  ought  to  be 
advanced  or  kept  stable;  that  railway  rates  ought  to  be  raised  or 
lowered;  that  "  trusts  "  have  manipulated  the  prices  of  their 
products  to  the  benefit  or  the  injury  of  the  public;  that  tariff 
changes  have  helped  or  harmed  producers  or  consumers;  that 
immigration  ought  to  be  encouraged  or  restricted;  that  the  mone- 
tary system  ought  to  be  reformed;  that  natural  resources  are 
being  depleted  or  that  the  national  dividend  is  growing.  They 
are  called  in  to  explain  why  bonds  have  fallen  in  price  and  why 
interest  rates  have  risen,  why  public  expenditures  have  increased, 
why  social  unrest  prevails  in  certain  years,  why  farmers  are  pros- 
perous or  the  reverse,  why  unemployment  fluctuates,  why  gold  is 
being  imported  or  exported,  and  why  political  "  landslides  " 
come  when  they  do. 

The  compiler  of  a  general-purpose  index  number,  then,  cannot 
foresee  to  what  uses  and  misuses  his  figures  will  be  put.  For  each 
of  the  legitimate  uses  he  might  conceivably  devise  an  appropriate 
series.  But  he  cannot  conceivably  devise  a  single  series  that  will 
serve  all  uses  equally  well.  For  the  very  qualities  that  make  an 
index  number  good,  say,  for  the  man  of  affairs  concerned  with  the 
business  outlook,  may  make  it  bad  for  other  men  interested  in  the 
fortunes  of  farmers,  in  the  effects  of  the  tariff,  in  the  relation 
between  gold  output  and  prices,  in  comparing  changes  in  price 
levels  in  different  countries,  etc.  The  day  has  not  yet  come  when 
the  uses  of  index  numbers  are  sufficiently  differentiated  and 
standardized  to  secure  the  regular  publication  of  numerous 


54  BUSINESS  STATISTICS 

special-purpose  series.  Until  that  day  does  come  the  making  of 
general-purpose  series  will  continue  and  the  makers  will  go  on 
choosing  their  methods  perforce  on  rather  vague  and  general 
grounds.  So  long  also  must  most  of  the  users  of  index  numbers 
put  up  with  figures  imperfectly  adapted  to  their  ends. 

The  critical  student  of  contemporary  index  numbers  is  in  the 
same  uncomfortable  position  as  the  compiler.  He  has  no  single 
rule  of  right  and  wrong  to  apply  in  judging  the  different  general- 
purpose  series,  for  methods  that  are  legitimate  for  certain  uses  are 
questionable  for  others.  Nevertheless,  it  is  futile  (though  not 
uncommon)  for  him  to  discuss  methods  without  reference  to  uses, 
since  a  statistical  method  has  neither  merits  nor  defects  except  as 
a  means  to  certain  ends.  The  one  course  that  is  open  to  him  is  to 
invert  the  problem.  Instead  of  studying  methods  in  the  light  of 
uses,  he  must  study  uses  in  the  light  of  methods.  That  is,  he 
must  analyze  the  effect  of  the  different  methods  followed  in  prac- 
tice and  so  determine  what  the  resulting  figures  mean  and  the 
uses  to  which  they  may  properly  be  put. 

The  following  discussion  proceeds  upon  this  plan.  It  deals 
primarily  with  the  popular  general-purpose  series  and  endeavors 
to  show  how  the  various  methods  used  in  constructing  these  index 
numbers  determine  the  uses  to  which  they  are  severally  adapted. 

Collecting  and  Publishing  the  Original  Quotations 

The  reliability  of  an  index  number  obviously  depends  upon  the 
judgment  and  the  accuracy  with  which  the  original  price  quota- 
tions were  collected.  This  field  work  is  not  only  fundamental,  it  is 
also  laborious,  expensive,  and  perplexing  beyond  any  other  part 
of  the  whole  investigation.  Only  those  who  have  tried  to  gather 
from  the  original  sources  quotations  for  many  commodities  over  a 
long  series  of  years  appreciate  the  difficulties  besetting  the  task. 
The  men  who  deal  with  data  already  published  are  prone  to  regard 
all  this  preliminary  work  as  a  clerical  compilation  requiring  much 
industry  but  little  skill.  To  judge  from  the  literature  about  index 
numbers  one  would  think  that  the  difficult  and  important  prob- 
lems concern  methods  of  weighting  and  averaging.  But  those 
who  are  practically  concerned  with  the  whole  process  of  making 


STATISTICAL  METHODS  55 

an  index  number  from  start  to  finish  rate  this  office  work  lightly 
in  comparison  with  the  field  work  of  getting  the  original  data. 

We  commonly  speak  of  the  wholesale  price  of  articles  like  pig 
iron,  cotton,  or  beef  as  if  there  were  only  one  unambiguous  price 
for  any  one  thing  on  a  given  day,  however  this  price  may  vary 
from  one  day  to  another.  In  fact  there  are  many  different  prices 
for  every  great  staple  on  every  day  it  is  dealt  in,  and  most  of  these 
differences  are  of  the  sort  that  tend  to  maintain  themselves  even 
when  markets  are  highly  organized  and  competition  is  keen.  Of 
course  varying  grades  command  varying  prices,  and  so  as  a  rule 
do  large  lots  and  small  lots;  for  the  same  grade  in  the  same  quan- 
tities, different  prices  are  paid  by  the  manufacturer,  jobber,  and 
local  buyer;  in  different  localities  the  prices  paid  by  these  various 
dealers  are  not  the  same;  even  in  the  same  locality  different 
dealers  of  the  same  class  do  not  all  pay  the  same  price  to  everyone 
from  whom  they  buy  the  same  grade  in  the  same  quantity  on  the 
same  day.  To  find  what  really  was  the  price  of  cotton,  for 
example,  on  February  i,  191 5,  would  require  an  elaborate  inves- 
tigation, and  would  result  in  showing  a  multitude  of  different 
prices  covering  a  considerable  range. 

Now  the  field  worker  collecting  data  for  an  index  number  must 
select  from  among  all  these  different  prices  for  each  of  his  com- 
modities the  one  or  the  few  series  of  quotations  that  make  the 
most  representative  sample  of  the  whole.  He  must  find  the  most 
reliable  source  of  information,  the  most  representative  market, 
the  most  typical  brands  or  grades,  and  the  class  of  dealers  who 
stand  in  the  most  influential  position.  He  must  have  sufficient 
technical  knowledge  to  be  sure  that  his  quotations  are  for  uniform 
qualities,  or  to  make  the  necessary  adjustments  if  changes  in 
quality  have  occurred  in  the  markets  and  require  recognition  in 
the  statistical  office.  He  must  be  able  to  recognize  anything 
suspicious  in  the  data  offered  him  and  to  get  at  the  facts.  He 
must  know  how  commodities  are  made  and  must  seek  comparable 
information  concerning  the  prices  of  raw  materials  and  their 
manufactured  products,  concerning  articles  that  are  substituted 
for  one  another,  used  in  connection  with  one  another,  or  turned 
out  as  joint  products  of  the  same  process.     He  must  guard 


S6  BUSINESS  STATISTICS 

against  the  pitfalls  of  cash  discounts,  premiums,  rebates,  deferred 
payments,  and  allowances  of  all  sorts.  And  he  must  know 
whether  his  quotations  for  different  articles  are  all  on  the  same 
basis,  or  whether  concealed  factors  must  be  allowed  for  in 
comparing  the  prices  of  different  articles  on  a  given  date. 

Difficult  as  it  is  to  secure  satisfactory  price  quotations,  it  is  stiU 
more  difficult  to  secure  satisfactory  statistics  concerning  the 
relative  importance  of  the  various  commodities  quoted.  What  is 
wanted  is  an  accurate  census  of  the  quantities  of  the  important 
staples,  at  least,  that  are  annually  produced,  exchanged,  or  con- 
sumed. To  take  such  a  census  is  altogether  beyond  the  power  of 
the  private  investigators  or  even  of  the  Government  bureaus  now 
engaged  in  making  index  numbers.  Hence  the  compilers  are 
forced  to  confine  themselves  for  the  most  part  to  extracting  such 
information  as  they  can  from  statistics  already  gathered  by  other 
hands,  and  for  other  purposes  than  theirs.  In  the  United  States, 
for  example,  estimates  of  production,  consumption,  or  exchange 
come  from  most  miscellaneous  sources:  From  the  Department  of 
Agriculture,  the  Census  Office,  the  Treasury  Department,  the 
Bureau  of  Mines,  the  Geological  Survey,  the  Internal  Revenue 
Office,  the  Mint,  associations  of  manufacturers  or  dealers,  trade 
papers,  produce  exchanges,  traffic  records  of  canals  and  railways, 
etc.  The  man  who  assembles  and  compares  estimates  made  by 
these  various  organizations  finds  among  them  many  glaring  dis- 
crepancies for  which  it  is  difficult  to  account.  Such  conflict  of 
evidence  when  two  or  more  independent  estimates  of  the  same 
quantity  are  available  throws  doubt  also  upon  the  seemingly 
plausible  figures  coming  from  a  single  source  for  other  articles. 
To  extract  acceptable  results  from  this  mass  of  heterogeneous 
data  requires  intimate  familiarity  with  the  statistical  methods  by 
which  they  were  made,  endless  patience,  and  critical  judgment  of 
a  high  order,  not  to  speak  of  tactful  diplomacy  in  dealing  with  the 
authorities  whose  figures  are  questioned.  The  keenest  investi- 
gator, after  long  labor,  can  seldom  attain  more  than  a  rough 
approximation  to  the  facts.  Yet  it  is  only  by  critical  use  of  the 
data  now  available  that  current  index  numbers  can  be  weighted, 
and  the  best  hope  of  improving  weights  in  the  future  lies  in 


STATISTICAL  METHODS  57 

demonstrating  not  only  the  imperfections  of  our  present  statistics 
of  production,  consumption,  and  exchange,  but  also  the  impor- 
tance of  making  them  better. 

When  all  this  preliminary  work  has  been  done,  the  t)riginal 
quotations  and  the  weights  should  be  published  at  length. 
Unfortunately,  many  compilers  of  index  numbers  publish  only 
the  final  results  of  their  computations,  upon  the  ground  of  ex- 
pense or  lack  of  interest  in  the  detailed  information.  But  much 
is  sacrificed  by  taking  this  easy  course.  First,  the  reputation  of 
the  index  number  itself  is  compromised  and  deservedly.  No  one 
can  really  test  whether  a  series  is  accurately  compiled  from  repre- 
sentative quotations  unless  the  data  and  their  sources  are  given 
in  full.  Second,  and  more  important,  the  publication  of  actual 
quotations  greatly  extends  the  usefulness  of  an  investigation  into 
prices.  Men  with  quite  other  ends  in  view  than  those  of  the 
original  compilers  can  make  index  numbers  of  their  own  adapted 
to  their  peculiar  purposes  if  provided  with  the  original  data. 

Nor  is  the  importance  of  such  unplanned  uses  to  be  rated 
lightly.  If  we  are  ever  to  make  the  money  economy  under  which 
we  live  highly  efficient  in  promoting  social  welfare  we  must  learn 
how  to  control  its  workings.  What  wares  our  business  enterprises 
produce  and  what  goods  our  families  consume  are  largely  deter- 
mined by  existing  prices,  and  the  production  and  consumption  of 
goods  are  altered  by  every  price  fluctuation.  What  we  waste  and 
what  we  save,  how  we  divide  the  burden  of  labor  and  how  we 
distribute  its  rewards,  whether  business  enjoys  prosperity  or 
suffers  depression,  whether  debts  of  long  standing  become  easier 
or  harder  to  pay  —  all  these  and  many  other  issues  turn  in  no 
small  measure  upon  what  things  are  cheap  and  what  are  dear, 
upon  the  maintenance  of  a  due  balance  within  the  system  of 
prices,  upon  the  upward  or  downward  trend  of  the  price  changes 
that  are  always  taking  place.  But  if  the  prices  of  yesterday  are 
powerful  factors  in  determining  what  we  shall  do  and  how  we 
shall  fare  today,  what  we  do  and  how  we  fare  today  are  powerful 
factors  in  determining  what  prices  shall  be  tomorrow.  If  prices 
control  us  we  also  control  them.  To  control  them  so  that  they 
shall  react  favorably  upon  our  economic  fortunes  we  need  more 


58  BUSINESS  STATISTICS 

insight  than  we  have  at  present.  It  is,  then,  one  of  the  great 
tasks  of  the  future  to  master  the  complicated  system  of  prices 
which  we  have  gradually  developed  —  to  find  how  prices  are 
interconnected,  how  and  why  they  change,  and  what  conse- 
quences each  change  entails.  For  when  men  have  learned  these 
things  they  will  be  vastly  more  skillful  in  mending  what  they  find 
amiss  in  economic  life,  and  in  reenforcing  what  they  find  good. 
As  yet  our  knowledge  is  fragmentary  and  uncertain.  But  of  all 
the  efforts  being  made  to  extend  it  none  is  so  certain  to  prove 
fruitful  as  the  effort  to  record  the  actual  prices  at  which  large 
numbers  of  conamodities  are  bought  and  sold.  For  such  data  are 
the  materials  with  which  all  investigators  must  deal,  and  without 
which  no  bits  of  insight  can  be  tested.  Indeed,  it  is  probable  that 
long  after  the  best  index  numbers  we  can  make  today  have  been 
superseded,  the  data  from  which  they  were  compiled  will  be 
among  the  sources  from  which  men  will  be  extracting  knowledge 
which  we  do  not  know  enough  to  find. 

Market  Prices,  Contract  Prices,  and  Import-Export  Values 

All  the  American  index  numbers  are  made  from  "  market 
prices."  These  prices  are  usually  obtained  directly  from  manu- 
facturers, selling  agents,  or  wholesale  merchants;  from  the  records 
of  produce  exchanges  and  the  like;  or  from  trade  journals  and 
newspapers  which  make  a  specialty  of  market  reporting  in  their 
respective  fields. 

Several  of  the  important  foreign  index  nmnbers  are  made 
wholly  or  partly  from  "  import  and  export  values  ";  that  is,  from 
the  average  prices  of  important  articles  of  merchandise  as  officially 
declared  by  the  importing  or  exporting  firms,  or  as  determined  by 
governmental  commissions.  For  example,  Soetbeer's  celebrated 
German  series,  and  the  British  Board  of  Trade's  official  series  are 
made  mainly  from  such  material,  and  the  official  French  series 
was  made  wholly  from  import  values  until  191 1. 

A  third  source  of  quotations  often  drawn  upon  in  Europe  is  the 
"  contract  prices  "  paid  for  supplies  by  such  institutions  as 
hospitals,  normal  schools,  poorhouses,  army  posts,  and  the 
like.  The  official  Italian  series,  Alberti's  series  for  Trieste,  and 
Levasseur's  French  series  are  examples. 


STATISTICAL  METHODS  59 

These  three  classes  of  quotations  —  market  prices,  import  and 
export  values,  and  contract  prices  —  usually  differ  somewhat,  not 
only  with  respect  to  the  prices  prevailing  on  a  given  date,  but 
also  with  respect  to  the  degree  of  change  from  time  to  time. 
Accordingly  it  is  desirable  to  inquire  into  the  several  advantages 
possessed  by  each  source  of  quotations. 

Contract  prices  may  be  set  aside  promptly,  because  index 
numbers  made  from  them  have  a  limited  range  of  usefulness. 
Though  the  institutions  whose  records  are  drawn  upon  often 
make  purchases  on  a  considerable  scale,  yet  the  common  descrip- 
tion of  their  contract  rates  as  "semi- wholesale''  prices  points  to 
the  peculiar  and  therefore  unrepresentative  character  of  such 
data.  Moreover,  there  is  often  more  doubt  about  the  strictly 
uniform  character  of  the  supplies  furnished  to  these  institutions 
than  about  the  uniformity  of  the  standardized  goods  which  are 
usually  quoted  in  the  market  reports.  If  the  aim  of  the  investi- 
gation is  to  find  the  average  variations  in  the  cost  of  supplies  to 
public  institutions,  doubtless  contract  prices  are  the  best  data  to 
use.  But  if  the  aim  is  to  measure  the  average  variations  in  the 
wholesale  prices  paid  by  the  business  world  at  large,  then  market 
prices  are  distinctly  the  better  source.  Indeed,  contract  prices  are 
seldom  used  for  the  latter  purpose  except  when  well-authenticated 
market  quotations  cannot  be  had. 

The  theory  on  which  import  and  export  values  are  sometimes 
preferred  to  market  prices  is  that  the  former  figures  show  more 
nearly  the  variations  in  the  prices  actually  paid  or  received  by  a 
country  for  the  great  staples  which  it  buys  and  sells  than  do 
market  quotations  for  particular  brands  or  grades  of  these  com- 
modities. For  example,  England  buys  several  different  kinds  of 
cotton  in  proportions  that  vary  from  year  to  year.  A  price 
obtained  by  dividing  the  total  declared  values  of  all  the  cotton 
consignments  imported  by  their  total  weight  will  show  the 
average  cost  per  pound  actually  paid  by  Englishmen  for  cotton 
with  more  certainty  than  will  Liverpool  market  quotations  for  a 
single  grade  of  cotton  like  "Middling  American"  —  provided 
always  that  the  "  declared  values  "  are  trustworthy.  Now,  if  the 
aim  of  the  investigation  is  to  find  out  the  variations  in  the  average 


6o 


BUSINESS  STATISTICS 


prices  paid  or  received  for  staples  —  irrespective  of  minor  changes 
in  their  qualities  —  then  the  preference  for  import  and  export 
values  is  clearly  justified,  again  granted  the  trustworthiness  of  the 
returns.  But  if  the  aim  is  to  measure  just  one  thing  —  the 
average  variation  in  prices  —  market  prices  for  uniform  grades 
are  clearly  better  data.    For  index  numbers  made  from  import 

Table  I.   Comparison  of  Index  Numbers  made  from  Import  and  Export 

Values  with  Index  Numbers  made  from  Market  Prices  of  same 

Commodities,  by  Years,  1871  to  1902 

[Data  from  the  British  Board  of  Trade  and  from  Sauerbeck.] 
(Arithmetic  means  of  relative  prices.    Average  prices  in  1890-1899  =  100.     25  commodities.) 


Year 


1871 
1872 
1873 
1874 
1875 
1876 

1877 
1878 
1879 
1880 
1881 
1882 
1883 
1884 
1885 
1886 


Import 

and  export 

values 

Market 
prices 

158 
169 
170 
162 

170 
185 
182 
168 

152 

155 

149 

152 

139 
128 

152 
138 
131 

136 

137 

^33 

130 

129 

125 

125 
118 

123 
116 

no 

112 

105 

107 

Year 


1887 
1888 
1889 
1890 
1891 
1892 
1893 
1894 
1895 
1896 
1897 
1898 
1899 
1900 
I901 
1902 


Import 

and  export 

values 


104 
108 
108 
109 
III 

105 
103 

95 
93 
94 
93 
95 

lOI 

114 
107 
104 


Market 
prices 


107 

no 

no 

III 

III 

103 

104 

94 

94 

93 

91 

95 

105 

117 

106 

104 


and  export  values  measure  the  net  resultant  of  two  sets  of 
changes,  and  one  cannot  tell  from  the  published  figures  what 
part  of  the  fluctuations  is  due  to  changes  in  prices  and  what  part 
is  due  to  changes  in  the  quahties  of  the  goods  bought  and  sold. 

As  might  be  expected  import  and  export  series  generally  pursue 
a  more  even  course  than  market-price  series.  But  this  difference 
may  be  due  less  to  the  sources  from  which  the  quotations  are 
obtained  than  to  differences  in  the  lists  of  commodities  used. 
Fortunately,  we  can  arrange  a  more  certain  test  than  any  of  the 


STATISTICAL  METHODS  6 1 

common  series  provide.  In  1903  the  British  Board  of  Trade 
published  the  average  import  or  export  prices  of  25  commodities 
for  which  Mr.  Sauerbeck  has  published  market  prices. ^  Index 
numbers  made  from  these  two  sets  of  data  for  the  same  commod- 
ities for  the  years  187 1  to  1902  are  given  in  Table  I.  The  results 
confirm  the  expectation:  As  compared  with  the  import  and  export 
index  number,  the  market-price  index  number  starts  on  a  higher 
level  in  1871,  falls  to  a  lower  point  during  the  middle  nineties, 
rises  to  a  higher  level  in  1900,  and  again  drops  to  as  low  a  level 
in  1902. 

Relative  Versus  Actual  Prices 

In  February,  1864,  Hunt's  Merchants^  Magazine  published  the 
following  statement  to  show  how  rapidly  prices  rose  after  the 
suspension  of  specie  payments  in  December,  1861,  and  the  issue 
of  the  irredeemable  United  States  notes.^  These  figures  are  the 
total  prices  of  55  articles  quoted  by  their  customary  commercial 
units. 

Value  of  55  Leading  Articles  of  New  York  Commerce 

January,  1862 $804 

April,  1862 844 

January,  1863 1,312 

March,  1863 1,524 

July,  1863 1,324 

October,  1863 1,455 

January,  1864 1,693 

For  example,  in  January,  1862,  coal  oil  is  entered  as  30  cents  per 
gallon  and  pig  iron  as  $24  per  ton;  molasses  is  entered  as  42 J 
cents  per  gallon  and  whalebone  as  $69  per  ton;  oats  is  entered  as 
38  cents  per  bushel  and  com  as  $59.25  per  hundred  bushels,  etc.^ 
Clearly,  this  simple  method  of  measuring  changes  in  the  price 
level  by  casting  sums  of  actual  prices  is  not  trustworthy.  For  a 
relatively  slight  fall  in  the  quotation  for  whalebone  would  affect 
the  total,  as  Hunt's  Merchants^  Magazine  computes  it,  much 
more  than  a  relatively  enormous  increase  in  the  price  of  molasses. 

^  .  .  .  For  Sauerbeck's  figures  see  his  annual  articles  in  the  Journal  of  the 
Royal  Statistical  Society.  .  .  . 

2  Vol.  50,  p.  132.  '  See  vol.  48,  p.  129. 


62  BUSINESS  STATISTICS 

The  fact  that  com  happens  to  be  quoted  by  the  hundred  bushels 
makes  a  i  per  cent  change  from  its  price  in  January,  1862,  equal 
to  a  43  per  cent  change  in  the  price  of  wheat  and  to  a  156  per 
cent  change  in  the  price  of  oats,  both  of  which  are  quoted  by 
the  bushel. 

It  was  to  avoid  such  patent  absurdities  that  Carli  threw  his 
actual  prices  of  grain,  wine,  and  olives  in  1750  into  the  form  of 
percentages  of  rise  or  fall  from  their  prices  in  1500,  and  then 
struck  the  average  of  the  three  percentages.  When  this  operation 
is  performed  it  makes  no  difference  whether  the  commodities  are 
,  quoted  by  large  or  by  small  units.  The  obvious  common  sense  of 
this  precedent  has  caused  it  to  be  followed  or  reinvented  by  most 
makers  of  index  numbers  to  this  day  —  with  one  slight  modii&ca- 
tion.  To  avoid  the  awkwardness  of  the  plus  and  minus  signs 
necessary  to  indicate  whether  prices  have  advanced  or  receded, 
it  is  usual  to  substitute  for  percentages  of  rise  or  fall  relative  prices 
on  the  scale  of  100.  For  example,  a  rise  of  10  per  cent  and  a  fall 
of  10  per  cent  are  expressed  by  relatives  of  no  and  90,  respec- 
tively. Occasionally,  however,  percentages  of  rise  or  fall  are  still 
used  as  by  Carli;  as,  for  instance,  in  the  chain  relatives  published 
by  the  Bureau  of  Labor  Statistics  in  Bulletin  No.  149.  A  second 
unimportant  variant,  long  practiced  by  the  Economist,  but  now~ 
seldom  used,  is  to  publish  as  the  final  result  the  sums  of  relative 
prices,  instead  of  their  averages.^ 

In  recent  years  a  few  statisticians  have  gone  back  from  the  use 
of  relative  to  the  use  of  actual  prices,  adopting  various  devices  to 
avoid  such  crude  errors  as  those  perpetrated  in  the  figures  cited 
from  Hunt's  Merchants^  Magazine.  In  1897  BradstreeVs  began 
reducing  all  its  original  quotations  by  the  gallon,  ton,  dozen, 
square  yard,  etc.,  to  prices  by  the  pound,  and  presenting  as  its 
index  number  the  aggregate  prices  per  pound  of  98  articles.^ 
Four  years  later,  Dun's  Review  followed   this   lead,  with  an 

1  Gibson's  index  number  is  such  a  sum.  The  difference  between  sums  of  relative 
prices  and  these  simis  divided  by  the  number  of  articles  included  is,  of  course, 
purely  formal.  Averages  have  displaced  sums  in  current  use  mainly  because  it  is 
easier  to  make  comparisons  on  the  scale  of  100  than  on  the  scale  of  2,200,  whatever 
number  is  given  by  the  addition  of  relative  prices. 

2  For  a  criticism  of  this  method,  see  p.  95. 


STATISTICAL  METHODS  63 

important  difference.  Instead  of  reducing  actual  quotations  to 
quotations  by  the  pound,  it  multiplied  the  actual  quotation  for 
each  article  included  by  the  quantity  of  that  article  supposed  to  be 
consumed  in  the  course  of  a  year  by  the  average  individual. 
These  products  were  then  cast  up,  and  the  smns,  in  dollars  and 
cents,  were  presented  as  an  index  number  purporting  to  show  the 
changes  in  the  per  capita  cost  of  a  year's  supplies.^ 

Base  Periods 

When  relative  prices  are  used  it  is  necessary  to  select  the  quota- 
tions of  some  given  period  as  a  base.  The  actual  prices  in  this 
base  period  are  called  100;  all  antecedent  and  subsequent  prices 
are  divided  by  the  base  prices,  and  the  quotients,  multiplied  by 
100,  make  the  relatives  which  are  usually  summed  and  divided  by 
the  number  of  commodities  to  get  the  final  index  number. 

In  some  cases  the  prices  of  a  single  day  have  been  used  as  the 
base,  but  as  a  rule  average  prices  for  a  year,  five  years,  a  decade, 
or  an  even  longer  period  have  been  preferred.  For  this  preference 
there  is  a  simple  justification  when  arithmetic  means  are  used  as 
averages  of  the  relative  prices.  If  the  price  of  any  commodity 
happens  to  be  unusually  high  or  unusually  low  in  the  base  period, 
its  relative  prices  at  other  periods  will  be  correspondingly  high  or 
low,  and  very  high  relative  prices,  especially,  may  exercise  an 
undue  influence  upon  arithmetic  means.  If  an  appreciable  pro- 
portion of  the  commodities  in  the  list  be  very  high  or  very  low, 
the  final  index  number  may  be  distorted.  Though  numerically 
correct,  the  results  have  less  significance  than  if  they  showed 
changes  in  terms  of  prices  that  men  consider  "  normal."  Of 
course  exceptionally  high  or  exceptionally  low  quotations  are  less 
likely  to  last  for  a  year  than  for  a  day,  and  less  likely  to  last  for  a 
decade  than  for  a  year. 

The  period  chosen  as  base  should  be  that  period  with  which 
accurate  comparisons  are  most  significant  for  the  purpose  in 
hand.  Probably  most  users  of  general-purpose  index  numbers 
prefer  to  make  their  comparisons  with  recent  dates.    Hence  the 

^  The  confidence  merited  by  this  index  number  is  discussed  on  pp.  95-96. 


64  BUSINESS  STATISTICS 

case  for  "  chain  "  indexes  is  very  strong  —  that  is,  for  indexes 
which  show  the  average  rise  or  fall  of  prices  on  the  basis  of  prices 
in  the  preceding  year.  Hence,  also,  any  index  number  with  a 
fixed  base  becomes  in  one  respect  less  significant  the  longer  it  is 
maintained.  For  example,  when  the  Bureau  of  Labor  Statistics' 
series  was  established  in  1902,  the  public  was  interested  to  know 
how  much  prices  in  that  year  had  changed  in  terms  of  average 
prices  in  the  decade  1890-1899.  In  1915,  however,  we  care  less 
about  a  measurement  of  change  in  terms  of  what  prices  were  16 
to  25  years  ago  than  we  care  about  how  much  prices  have  changed 
with  reference  to  19 14.  Similarly,  Sauerbeck's  index  number 
suffers  in  significance  now  because  it  forces  one  to  make  all  com- 
parisons in  terms  of  prices  in  a  period  that  ended  before  most  of 
the  people  now  living  were  old  enough  to  know  the  meaning  of 
prices. 

A  further  advantage  of  chain  index  numbers  is  that  they  make 
the  dropping  of  obsolescent  and  the  adding  of  new  commodities 
especially  easy.  It  is  difficult  to  keep  the  list  of  commodities 
included  in  a  fixed-base  system  really  representative  of  the  mar- 
kets over  a  long  period  of  time.  Barring  perhaps  thirty  or  so 
staple  raw  materials  that  hold  their  importance  for  centuries  at  a 
time,  most  commodities  have  their  day  of  favor  and  then  yield 
to  new  products.  Consequently  the  compilers  can  hardly  let  two 
decades  pass  without  revising  their  lists,  in  certain  details,  or 
seeing  them  lose  in  significance.  But  since  a  chain  index  does  not 
profess  to  give  accurate  comparisons  except  between  successive 
years  the  compiler  feels  himself  free  to  improve  his  list  whenever 
he  can.  It  is  very  much  easier  to  include  many  commodities  on 
this  plan.  And  if  the  index  number  be  weighted,  the  chain  index 
has  a  similar  advantage  in  facilitating  the  frequent  revision  of 
the  weights. 

Once  more,  year-to-year  variations  of  prices  can  be  measured 
with  a  closer  approach  to  accuracy  than  variations  covering  a 
longer  period  of  time.  For  the  former  variations  are  highly  con- 
centrated about  their  central  tendency  while  the  variations  from 
what  prices  used  to  be  years  ago  are  widely  dispersed.  The  longer 
a  fixed-base  system  is  maintained,  indeed,  the  more  scattered 


STATISTICAL  METHODS  65 

become  the  relative  prices  as  a  rule.  Hence  the  variations  are  less 
and  less  aptly  represented  by  any  average  that  can  be  devised, 
and  the  margin  of  error  to  which  the  results  are  subject  grows 
wider.  In  other  words,  with  a  given  body  of  quotations  to  build 
upon,  chain  relatives  are  more  trustworthy  than  their  rivals; 
and,  as  has  just  been  said,  it  is  feasible  to  provide  a  larger  body 
of  quotations  for  chain  relatives  than  for  a  fixed-base  series. 

Finally,  another  aspect  of  the  wide  dispersion  that  becomes 
characteristic  of  fixed-base  relatives  with  the  lapse  of  years 
merits  separate  mention.  The  commodities  that  have  a  consist- 
ent long-period  trend  gradually  climb  far  above  or  fall  far  below 
the  average  relative  prices.  Then  the  high  relative  prices  of  the 
first  group  come  to  exercise  much  more  influence  upon  the  posi- 
tion of  the  average  itself  than  do  the  low  relative  prices  of  the 
second  group.  A  10  per  cent  change  in  the  price  of  an  article 
whose  price  has  already  doubled  will  count  four  times  as  much  as 
a  10  per  cent  change  in  the  price  of  an  article  whose  price  has 
dropped  by  half.  For  most  purposes,  this  development  is  to  be 
regarded  as  a  defect  of  the  fixed-base  series.  For  commodities 
seldom  gain  in  importance  because  of  a  great  rise  in  price;  on  the 
contrary,  the  commodities  that  become  cheaper  are  likely  to  be 
consumed  and  produced  on  an  increasing  scale.  Against  this 
danger  of  magnifying  the  influence  of  articles  that  are  becoming 
costly  and  minimizing  the  influence  of  articles  that  are  becoming 
cheap,  no  care  in  the  selection  of  a  base  avails  for  long  if  the  base 
be  fixed. 

Chain  relatives  have  their  drawbacks  also.  Makers  of  index 
numbers  find  them  more  laborious  to  compute  than  fixed-base 
series,  since  most  of  the  actual  prices  used  as  divisors  change  every 
year.  And  users  of  index  numbers  find  a  chain  series  difiicult  to 
interpret  when  they  seek  to  know  how  much  prices  have  risen  or 
fallen  over  considerable  periods  of  time.  Of  course,  chain  rela- 
tives for  successive  years  can  be  multiplied  together  to  form  a 
continuous  series,  but  it  is  not  easy  to  give  the  later  members  of 
the  series  a  concrete  meaning.  To  know,  for  example,  that 
in  1 891  prices  fell,  on  the  average,  0.2  per  cent  below  their  level  in 
1890;  that  in  1892  they  fell  4.4  per  cent  below  their  new  level  in 


66  BUSINESS  STATISTICS 

1 89 1,  and  so  on  through  ups  and  downs  on  an  ever-changing  base 
for  every  year  to  191 5,  enables  one  to  make  a  series  beginning, 
say,  with  100  in  1890  and  running  on  with  99.8  in  1891,  95.4  in 

1892,  etc.,  to  some  result  for  1915.^  But  such  a  series  does  not 
enable  one  to  say  in  terms  of  what  a  comparison  is  made  between 
prices  in  191 5  and  in  1890.  Any  fixed-base  series  covering  these 
years,  on  the  contrary,  would  show  the  level  of  prices  both  in 
1890  and  in  191 5  in  terms  of  a  common  denominator  —  namely, 
the  level  at  which  prices  stood  in  the  base  period,  whatever  that 
was.  Hence  it  is  an  excellent  plan  to  make  from  the  original 
quotations  two  series  of  index  mmibers  —  one  a  chain  index  and 
the  other  a  fixed-base  series. 

Even  this  combination,  however,  is  far  from  meeting  all  the 
needs  of  users  of  index  nmnbers.  For  certain  users  may  require 
for  special  purposes  accurate  measurements  of  price  fluctuations 
in  terms  of  the  price  level  in  any  given  month  or  year,  or  any  given 
stretch  of  time  in  the  whole  period  covered  by  the  investigation. 
If  such  users  are  few  as  compared  with  all  the  people  who  note 
or  quote  the  popular  index  numbers,  they  are  precisely  the  few 
most  interested  in  price  fluctuations  and  most  likely  to  increase 
knowledge  by  their  use  of  the  figures.  But  of  course  compilers 
cannot  foresee  what  base  periods  would  serve  best  all  these  special 
purposes,  and  they  cannot  be  expected  to  work  out  index  numbers 
on  all  the  bases  made  possible  by  their  original  data.  It  is  there- 
fore highly  desirable  to  have  index  numbers  that  can  be  shifted 
from  one  base  to  another  both  readily  and  accurately. 

It  is  this  desideratum,  in  large  part,  that  has  led  to  the  recent 
reaction  against  index  numbers  made  by  striking  arithmetic 
means  of  relative  prices  and  in  favor  of  index  numbers  made  by 
adding  actual  prices.  For  the  latter  form  of  index,  being  a  sum  of 
dollars  and  cents,  can  be  thrown  into  the  form  of  a  series  of  rela- 
tive prices  upon  any  base  that  is  desired,  with  slight  labor  and 
without  inaccuracy;  whereas  arithmetic  means  of  relative  prices 
cannot  consistently  be  shifted  to  a  new  base  without  recomputing 
the  relative  prices,  commodity  by  commodity,  and  striking  new 
averages  from  these  new  relatives.  Such  recomputations  are  so 
^  For  an  example  of  this  method,  see  pp.  70-71. 


STATISTICAL  METHODS  67 

laborious  that  a  short  method  of  shifting  the  base  of  this  kind  of 
index  numbers  is  often  practiced  even  by  persons  quite  aware  of 
the  ambiguity  of  the  new  results.  This  method  consists  in  divid- 
ing the  figures  for  other  dates  by  the  figures  for  the  date  desired 
as  base  and  multiplying  the  quotients  by  100.  Of  course  this 
process  results  in  a  relative  price  of  100  for  the  new  base  period, 
and  the  other  figures  look  as  if  they  showed  average  relative  prices 
as  percentages  of  prices  at  this  period.  But  there  is  no  mathe- 
matical justification  for  assuming  that  results  reached  in  this  way 
must  agree  with  results  reached  by  recomputing  relative  prices 
for  each  commodity  on  the  new  base.  For  such  recomputation 
usually  alters  considerably  the  relative  influence  exercised  upon 
the  arithmetic  means  by  the  price  fluctuations  of  certain  commod- 
ities. Those  articles  which  are  cheaper  in  the  new  than  in  the 
old  base  period  get  higher  relative  prices  and  therefore  increased 
influence.  Vice  versa,  articles  that  are  dearer  in  the  new  base 
period  get  lower  relative  prices  and  therefore  diminished  influence. 
Of  course  the  short  method  of  shifting  the  base,  which  retains  the 
old  relative  prices,  does  not  permit  any  such  alteration  in  the 
influence  exercised  by  the  fluctuations  of  different  commodities. 
Hence  the  two  methods  of  shifting  the  base  seldom  yield  precisely 
the  same  results.  To  present  a  series  of  arithmetic  means  shifted 
by  the  short  method  as  showing  what  the  index  numbers  would 
have  been  if  they  had  been  computed  upon  the  new  base  is 
therefore  misleading. 

It  is  easy  to  arrange  examples  in  which  wide  discrepancies 
appear  between  the  results  of  the  two  methods  of  shifting  the 
base.  But  the  difficult  and  the  important  thing  is  to  find  out 
how  serious  the  discrepancies  are  in  actual  practice.  For  to  use 
index  numbers  effectively,  it  is  often  necessary  to  shift  the  base, 
and  sometimes  the  short  method  must  be  followed,  either  because 
recomputation  in  full  requires  a  prohibitive  amount  of  labor,  or 
because  the  original  data  necessary  for  recomputation  have  not 
been  published.  The  next  table  gives  three  pertinent  examples. 
In  the  first  case  when  Sauerbeck's  index  is  shifted  from 
1867-1877  =  100  to  1890-1899  =  100  the  discrepancies  are  fairly 
regular  and  rather  small  both  absolutely  and  relatively.    In  the 


68  BUSINESS  STATISTICS 

last  case,  when  the  same  series  is  shifted  to  i860  =  100,  the 
discrepancies  are  highly  irregular  from  year  to  year,  and  are 
rather  large  both  absolutely  and  relatively  —  several  times 
exceeding  5  per  cent  of  the  recomputed  figures.  In  the  remaining 
case  the  discrepancies  are  small  absolutely,  though  often  large 
relatively  to  the  recomputed  figures,  and  also  highly  variable 
from  year  to  year.^  The  conclusion  which  these  experiments 
suggest  is  that  the  two  methods  almost  always  give  different 
results;  that  the  discrepancies  are  by  no  means  constant  from 
year  to  year  in  a  given  case,  and  that  their  magnitude  both 
absolutely  and  relatively  differs  much  from  one  case  to  another. 
Hence  it  is  well  to  avoid  the  short  method  of  shifting  bases  when- 
ever possible;  and  when  that  method  must  be  used,  its  results 
should  not  be  treated  as  showing  what  the  index  number  would 
have  been  had  it  been  made  originally  on  the  new  base. 

The  second  of  the  preceding  examples  of  discrepancies  arising 
from  the  two  ways  of  shifting  bases  merits  especial  attention 
because  it  refers  to  the  new  and  important  chain  index  number 
published  by  the  Bureau  of  Labor  Statistics  in  Bulletin  No.  149. 
All  of  the  "  percentages  of  increase  or  decrease  compared  with 
each  preceding  year  or  month  "  on  pages  9  to  16  of  Bulletin  No. 
149  were  made  by  dividing  the  1 890-1 899  index  number  for  each 
date  by  the  corresponding  index  number  for  the  preceding  date. 
Consequently  these  results  are  not  precisely  what  the  captions, 
under  which  they  appear,  suggest.  The  fact  that  the  discrep- 
ancies between  the  two  sets  of  results  are  small,  never  exceeding 
1.5  points  in  the  scale  of  percentage  changes,  affords  striking 
confirmation  of  a  conclusion  drawn  in  Section  III  from  the  dis- 

^  The  discrepancies  shown  in  the  table  do  not  result  wholly  from  the  mathemati- 
cal inconsistency  of  the  short  method;  but  partly  from  the  fact  that  when  an  index 
number  is  shifted  to  a  new  base  by  recomputation  in  full  it  is  commonly  impossible 
or  vmdesirable  to  utilize  all  the  original  data.  Some  commodity,  for  example,  may 
not  be  quoted  for  the  dates  used  as  the  new  base,  and  therefore  has  either  to  be 
dropped  or  introduced  at  a  later  date  by  means  of  some  doubtful  assumption  as  to 
what  its  price  would  have  been  had  it  been  quoted  for  the  full  period.  Of  course 
this  observation  makes  the  objection  to  using  the  short  method  stronger  rather  than 
weaker.  It  means  that  this  method  often  leads  the  statistician  into  uses  of  the 
original  data  which  he  would  have  avoided  had  he  imdertaken  the  recomputation 
of  the  index  number. 


STATISTICAL  METHODS  69 

tribution  of  price  variations. ^    Because  variations  from  prices  in 
the  preceding  year  are  highly  concentrated  about  a  central 

Table  II.    Examples  of  Discrepancies  between  Results  of  Two  Methods 
OF  Shifting  Bases  on  which  Index  Numbers  are  Computed 

(Arithmetic  means) 


Sauerbeck's 

index  num- 

Bureau  of  Labor  Statistics' 

Sauerbeck's 

ndex  number 

ber.  1890-1913 

index  number 

>i 

1860-1891 

2 

1 

? 

Is 

1—1  '-' 

gll 

II 

1 
ll 

Ml 

H 

111 
Ill 

1 

1 

II 

II 

i 

3 

Is 

c  II 
*-00 

II 
li 
If 

— m 

1 
§ 

S  II 

1 

1890 

72 

109 

109 

112.9 

i860 

99 

100,0 

lOO.O 

1891 

72 

109 

109 

111.7 

—  I.I 

—  0.2       0 

•9 

1861 

98 

99.0 

99.6 

0.6 

1892 

68 

103 

103 

106. 1 

-5.0 

—  4-4 

.6 

1862 

lOI 

102.0 

105.5 

35 

1893 

68 

103 

103 

105.6 

-  -5 

—     .2 

.3 

1863 

103 

104.0 

109.3 

5-3 

1894 

63 

OS 

95 

96.1 

-9.0 

-  8.7 

•3 

1864 

105 

106. 1 

II2.3 

6.2 

1895 

62 

94 

94 

93.6 

-2.6 

-  i.S       I 

.1 

i86s 

lOI 

102.0 

105.8 

3.8 

1896 

6i 

92 

92 

90.4 

-3-4 

-    2.8 

.6 

1866 

102 

103.0 

106.5 

3-5 

1897 

62 

94 

93 

I 

89.7 

-  .8 

+     .2 

•4 

1867 

100 

lOI.O 

103.9 

2.9 

1898 

64 

97 

97 

93.4 

+4-1 

+  4.8 

.7 

1868 

99 

100.0 

103. 1 

3.1 

1899 

68 

103 

104 

I 

101.7 

+8.9 

+10.4       I 

.5 

1869 

98 

99.0 

IOI.9 

2.9 

1900 

75 

114 

"5 

I 

1 10.5 

+8.7 

+  9.4 

•7 

1870 

96 

97.0 

100.3 

3-3 

1 901 

70 

106 

107 

I 

108.5 

-1.8 

—  I.I 

.7 

1871 

100 

lOI-.O 

102.6 

1.6 

1902 

69 

lOS 

106 

I 

112.9 

+4.1 

+  4.6 

.5 

1872 

109 

1 10. 1 

II2.5 

2.4 

1903 

69 

105 

106 

I 

II3-6 

+  .6 

+    1.2 

.6 

1873 

III 

112. 1 

II6.6 

4-5 

1904 

70 

106 

108 

2 

113.0 

-  -5 

—       .1 

.4 

1874 

102 

103.0 

107.0 

4.0 

190s 

72 

109 

III 

2 

"5-9 

+2.6 

+    2.9 

•3 

1875 

96 

97.0 

100.3 

3.3 

1906 

77 

117 

119 

2 

122.S 

+5-7 

+    5.8 

.1 

1876 

95 

96.0 

97-5 

1.5 

1907 

80 

121 

123 

2 

129.5 

+5.7 

+    6.0 

•3 

1877 

94 

95 -o 

97.4 

2.4 

1908 

73 

III 

112 

I 

122.8 

-5-2 

-  5.6 

.4 

1878 

87 

87.9 

91.2 

3.3 

1909 

74 

112 

114 

2 

126.5 

+3.0 

4-3.2 

.2 

1879 

83 

83.8 

86.7 

2.9 

1910 

78 

118 

120 

2 

1316 

+4.0 

+  4.1 

.1 

1880 

88 

88.9 

91.8 

2.9 

1911 

80 

121 

123 

2 

129.2 

-1.8 

-   1-9 

.1 

1881 

85 

85.9 

88.5 

2.6 

1912 

8S 

129 

130 

I 

133.6 

+3.4 

+  3.4      . . 

1882 

84 

84.9 

88.0 

3.1 

1913 

85 

129 

130 

I 

135-2 

+1.2 

+    1.2        .. 

1883 
1884 
1885 
1886 
1887 

82 
76 
72 
69 
68 

82.8 
76.8 
72.7- 
69.7 
68.7 

86.0 
79.3 
75-4 
72.4 
70.7 

3.2 
2.5 
2.7 
2.7 

2.0 

1888 
1889 
1890 
1891 

70 
72 
72 
72 

70.7 
72.7 
72.7 
72.7 

73.9 
76.7 
76.0 

75.4 

3.2 
4.0 
3.3 
2.7 

tendency,  while  variations  fronfi  the  prices  of  a  remoter  period  are 

widely  scattered,  it  was  argued  that  the  measurement  of  price 

changes  is  easy  in  proportion  as  the  time  during  which  these 

1  Bulletin  of  the  United  States  Bureau  of  Labor  Statistics,  No.  173,  pp.  10-24.  [Ed.] 


70  BUSINESS  STATISTICS 

changes  have  been  accumulating  is  short.  So,  now,  we  find  that 
dissimilar  methods  of  manipulating  the  same  data  yield  nearly 
the  same  results  when  they  are  applied  to  the  easy  problem  of 
making  a  chain  index  number. 

The  use  of  the  short  method  in  making  the  new  chain  indexes 
was  the  natural  result  of  a  practice  begun  by  the  bureau  in  1908 
—  a  practice  that  illustrates,  from  another  angle,  the  problem  of 
shifting  bases.  In  that  year  11  new  commodities  were  introduced 
into  the  bureau's  index  number.  Since  quotations  were  not 
secured  for  these  commodities  prior  to  1907,  relative  prices  could 
not  be  computed  for  them  on  the  1 890-1 899  base.  How,  then, 
could  these  new  articles  be  included  in  the  index  numbers  of  the 
groups  affected  ?  The  bureau  solved  this  problem  by  (i)  com- 
puting relative  prices  for  both  the  new  and  the  old  commodities 
in  1908  on  the  basis,  prices  in  1907  =  100,  (2)  averaging  these 
relatives,  and  (3)  shifting  these  new  index  numbers  for  1908  from 
the  1907  base  to  the  1 890-1 899  base.  This  shift  was  effected  by 
multiplying  the  group  index  numbers  for  1908,  on  the  1907  base, 
by  the  group  index  numbers  for  1907,  on  the  1 890-1 899  base. 

The  process  may  be  illustrated  from  the  group  of  farm  products. 
The  index  number  for  this  group  in  1907,  on  the  base,  prices  in 
1890-1899  =  100,  was  137. 1,  while  in  1908,  on  the  base,  prices  in 
1907  =  100,  the  index  number  was  97.1.  The  bureau  assumed 
that  since  prices  of  farm  products  in  1908  were,  on  the  average, 
97.1  per  cent  of  their  prices  in  1907,  and  since  their  prices  in  1907 
had  been  137. i  per  cent  of  their  prices  in  1890-1899,  therefore 
prices  in  1908  were  97.1  per  cent  of  137. i  per  cent  of  prices  in 
1 890-1 899;  that  is,  1 33. 1  per  cent  of  prices  in  1 890-1 899.  By 
repeating  this  process  in  later  years,  the  bureau  forged  its  suc- 
cessive chain  indexes  from  1908  to  1913  into  a  continuous  series. 

The  merits  and  defects  of  series  made  in  this  fashion  have 
already  been  canvassed.  The  one  fact  important  for  present 
purposes  is  that  the  results  of  this  method,  however  excellent  in 
other  ways,  do  not  agree  with  results  worked  out  on  a  fixed-base 
system.  Hence  the  bureau's  present  index  numbers  of  farm 
products,  foods,  and  lumber  and  building  materials  —  the  three 
groups  into  which  new  commodities  were  introduced  —  are  not 


STATISTICAL  METHODS  yi 

accurately  comparable  in  1908-19 13  either  with  its  figures  for 
these  same  groups  in  1890  to  1907,  or  with  its  1908-1913  figures 
for  the  six  remaining  groups.  Even  the  general  index  number  of 
all  commodities  is  affected  appreciably  by  the  admission  of  the 
inconsistent  elements  into  the  grand  totals  from  which  averages 
were  struck. 

The  question  remains:  How  much  difference  did  the  change  in 
method  make  ?  To  answer  one  must  find  a  better  way  of  intro- 
ducing the  II  new  commodities  into  the  old  list.  To  effect  this 
introduction,  some  assumption  is  necessary  concerning  the  re- 
lation of  their  prices  in  1907,  the  first  year  for  which  quotations 
were  obtained,  to  their  unknown  prices  in  the  base  period.  Per- 
haps the  bureau's  implicit  assumption  that  the  1907  index  number 
of  the  old  commodities  on  the  1 890-1 899  base  should  be  taken 
as  the  starting  point  for  computing  relative  prices  for  the  new 
commodities  is  as  defensible  as  any  other  guess  that  can  be  made. 
If  this  guess  be  accepted,  the  relative  prices  for  the  four  new  farm 
products  should  be  computed  on  the  base,  actual  prices  in  1907  = 
137. 1 ;  for  the  six  new  foods  on  the  base,  actual  prices  in  1907  = 
II 7.8,  and  for  the  one  new  kind  of  lumber  on  the  base,  actual 
prices  in  1907  =  146.9.  Then  the  relatives  for  the  new  commod- 
ities can  be  added  to  and  averaged  with  the  relatives  for  the  old 
without  more  ado.  If  this  method  be  applied  to  farm  products  the 
result  is  an  index  number  for  1908  of  133.4,  whereas  the  bureau's 
method  gives  13 3.1.  In  the  case  of  foods  we  get  121.5  instead  of 
the  bureau's  120.6,  and  in  the  case  of  lumber  and  building 
materials  13 1.8  instead  of  133. i. 

Now  the  discrepancies  between  these  two  sets  of  results  for  1908 
seem  small.  But  the  bureau  soon  made  them  large,  by  building 
its  index  for  1909  on  the  discrepancy  for  1908,  again  building  in 
1910  on  the  discrepancy  accumulated  in  1908  and  1909,  and  so  on. 
By  1 913  the  results  of  the  two  methods  for  farm  products  are 
far  apart;  the  two  figures  for  food  products  and  for  lumber 
and  building  materials  are  seriously  at  variance,  and  even  the 
general  index  numbers  for  all  commodities  show  a  difference  of 
4.2  points, 


^^  BUSINESS  STATISTICS 

The  Numbers  and  Kinds  of  Commodities  Incltded 

Since  the  earlier  makers  of  index  numbers  had  to  use  such  price 
quotations  as  they  could  find,  the  problems  how  many  and  what 
kinds  of  commodities  to  include  were  practically  solved  for  them. 
As  Professor  Edgeworth  remarks,  "  Beggars  cannot  be  choosers." 

Paucity  of  data  still  hampers  contemporary  efforts  to  measure 
variations  of  prices  in  the  past;  but  the  compilers  of  index  num- 
bers for  current  years  have  a  wider  range  of  choice.  The  scope  of 
their  data  is  limited  not  by  the  impossibiHty  but  by  the  expense 
of  collecting  quotations.  And  in  the  case  of  governmental  bureaus 
or  financial  journals  the  limits  set  by  expense  are  neither  narrow 
nor  rigid.  Such  organizations  can  choose  many  commodities  if 
they  will  or  content  themselves  with  few. 

One  principle  of  choice  is  generally  recognized.  Those  commod- 
ities are  preferable  that  are  substantially  uniform  from  market 
to  market  and  from  year  to  year.  Often  the  form  of  quotation 
makes  all  the  difference  between  a  substantially  uniform  and  a 
highly  variable  commodity.  For  example,  prices  of  cattle  and 
hogs  are  more  significant  than  prices  of  horses  and  mules,  because 
the  prices  of  cattle  and  hogs  are  quoted  per  pound,  while  the 
prices  of  horses  and  mules  are  quoted  per  head. 

It  is  often  argued  that  the  application  of  this  common-sense 
principle  rules  out  almost  all  manufactured  goods,  because  such 
articles  are  continually  being  altered  in  quality  to  suit  the  techni- 
cal exigencies  of  new  industrial  processes  or  the  varying  tastes  of 
consumers.  But  minor  changes  in  quality,  provided  their  occur- 
rence is  known,  do  not  necessarily  unfit  a  commodity  for  inclusion. 
When  the  brand  formerly  sold  is  replaced  by  a  variant  it  is  usu- 
ally possible  to  get  over-lapping  quotations  for  the  old  and  new 
qualities  during  the  time  of  transition.  Then  the  new  series  may 
be  spliced  upon  the  old  by  means  of  the  ratio  borne  by  the  price  of 
the  new  grade  to  the  price  of  the  old  grade  in  the  years  when  the 
substitution  is  made.  Statisticians  willing  to  take  the  extra 
precautions  and  trouble  involved  by  such  operations  can  legiti- 
mately include  not  only  a  large  number  of  staple  raw  materials 
and  their  simplest  products,  but  also  an  even  larger  number  of 
manufactured  goods. 


STATISTICAL  METHODS  73 

Some  of  the  modem  index  numbers,  accordingly,  have  long 
lists  of  commodities.  Dun's  index  number  seems  to  be  built  up 
from  310  series  of  quotations,  the  official  Canadian  index  number 
includes  272  articles,  the  Bureau  of  Labor  Statistics'  index  num- 
ber for  1 9 13  had  252,  and  the  new  weighted  index  number  for 
1914  contains  297  quotations  of  201  distinct  articles.  On  the 
other  hand,  many  of  the  best-known  index  nmnbers  use  less  than 
50  series  of  quotations.  Forty-five  is  a  favorite  number,  largely 
because  of  the  high  reputation  early  established  by  Sauerbeck's 
English  series.  The  British  Board  of  Trade's  series,  the  new 
official  French  series,  the  New  Zealand  series,  Von  Jankovich's 
Austrian  series,  and  Atkinson's  series  for  British  India,  all  have 
just  45  commodities,  while  the  new  series  of  the  London  Econo- 
mist and  the  relative  prices  published  by  the  Lnperial  Statistical 
Office  of  Germany  include  44  articles.  Even  shorter  lists  are 
often  used.  For  example,  Schmitz's  German  series  has  only  29 
commodities,  the  New  York  Annalist  series,  25,  and  Gibson's 
series,  22.  Private  investigators  working  with  limited  resources 
sometimes  confine  themselves  to  a  bare  dozen  commodities,  or 
even  less.^ 

These  differences  of  practice  raise  important  questions  of 
theory.  Does  it  make  any  substantial  difference  in  the  results 
whether  25  or  50  or  250  commodities  be  included  —  provided 
always  that  the  lists  be  well  chosen  in  the  three  cases  ?  If  differ- 
ences do  appear  in  the  results,  are  they  merely  haphazard,  or  are 
they  significant  differences  ?  If  there  are  significant  differences, 
which  set  of  results  is  more  valuable,  that  made  from  the  long  or 
from  the  short  lists  ?  And  what  does  the  proviso  that  the  lists  be 
well-chosen  mean  ?  In  short,  do  the  index  numbers  including 
hundreds  of  commodities  possess  any  real  advantages  over  those 

^  These  statements  refer  to  the  number  of  series  of  relative  prices  averaged  to  get 
the  final  results  as  now  presented.  Often  two  or  more  different  varieties  of  an  im- 
portant article  are  counted  as  separate  commodities,  and,  on  the  other  hand,  the 
relative  prices  of  slightly  different  articles  are  sometimes  averaged  to  make  one  of 
the  series  which  enters  into  the  final  averages.  In  view  of  the  diversity  of  practice 
in  this  respect,  a  perfectly  consistent  counting  of  the  number  of  distinct  "  commod- 
ities "  included  in  the  general  series  is  impossible.  Moreover,  the  figures  are  often 
published  with  such  imperfect  explanations  as  to  make  the  coimting  of  the  com- 
modities included  doubtful  or  impossible  on  any  interpretation  of  that  term. 


74  BUSINESS  STATISTICS 

including  50  or  25  to  compensate  for  the  greater  trouble  and 
expense  of  compiling  them  ? 

The  best  way  to  answer  these  questions  is  to  experiment  with 
large  and  small  index  nmnbers,  made  on  a  strictly  uniform  plan 
for  the  same  country  and  the  same  years.  Table  III  presents  six 
such  index  numbers  which  differ  only  in  respect  to  the  number 
and  kind  of  commodities  included.  The  first  column  includes  all 
the  commodities  quoted  by  the  Bureau  of  Labor  Statistics,  except 
the  II  whose  prices  do  not  run  back  of  1908.^  Many  of  the  com- 
modities in  this  list  are  merely  different  varieties  of  the  same 
article;  for  example,  there  are  two  kinds  of  corn  meal,  four  kinds 
of  leather,  six  kinds  of  women's  dress  goods,  eleven  kinds  of  steel 
tools,  etc.  The  second  column  gives  an  index  number  in  which 
all  such  groups  are  represented  by  single  averages,  so  that  the 
number  of  series  which  enter  directly  into  the  final  results  is  cut 
down  to  145.2  The  third  column,  which  includes  50  commodities, 
is  made  up  from  the  list  adopted  for  the  Gibson  index  number  in 
its  original  form.^  The  fourth  series  is  made  from  the  prices  of 
20  pairs,  each  commodity  being  given  in  two  forms,  raw  and 
manufactured,  e.  g.,  barley  and  malt,  cattle  and  beef,  copper 
ingots  and  copper  wire,  etc.  The  last  two  columns  contain  index 
numbers  each  made  from  the  prices  of  25  important  articles 
selected  at  random,  the  two  lists  having  no  items  in  common.^ 

Now,  these  six  index  numbers,  large  and  small,  certainly  have  a 
strong  family  likeness.  The  great  movements  of  American  prices 
since  1890  stand  out  boldly  in  them  all  —  the  heavy  fall  of  prices 
in  1890-1896,  the  distinctly  greater  rise  in  1896-1907,  the  sharp 
decline  in  1908,  the  recovery  in  1909,  and  the  wavering  course  in 
1910-1913.  If  index  numbers  could  pretend  to  nothing  more 
than  to  show  roughly  the  trend  of  price  fluctuations,  then  it 
would  indeed  matter  little  which  of  these  series  were  used.  Either 

1  To  facUitate  comparison,  decimals  have  been  dropped  and  the  index  for  each 
year  rounded  ofif  to  the  nearest  whole  number.  Further,  the  results  for  1908-1913 
are  changed  for  the  reasons  explained  on  pp.  70-71.  Regarding  the  changes  in  the 
number  of  commodities  included,  see  Bulletin  No.  149,  p.  11. 

2  For  the  list  of  145  commodities  see  Bulletin  of  the  United  States  Bureau  of  Labor 
Statistics,  No.  173,  p.  47.     [Editor.] 

'  Ibid.  4  75^ 


STATISTICAL  METHODS 


75 


Table  III.     Six  Index  Numbers  for  the  United  States  made  from 

Quotations  for  Different  Numbers  of  Commodities,  by  Years, 

1890  TO  1913. 

(Arithmetic  means.    Average  prices  in  1890-1899  =  100) 


Year 


242  to 
261 
com- 
mod- 
ities 


I4S 
com- 
mod- 
ities 


so  com- 
mod- 
ities 


40  com- 
mod- 
ities 


25  com- 
mod- 
ities, 
first 
Ust 


25  com- 
mod- 
ities, 

second 
Ust 


1890 

1891 

1892 

1893 

1894 

189s 

1896 

1897 

1898 

1899 

igoo 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

1911 

1912 

1913 

Averages  1890-1899 

1900-1909 

1910-1913 

Number  of  points  by  which  prices  rose 
(+)orfeU(-)in  — 

1890-1896 

1896-1907 

1907-1908 

1908-1912 

Difference  between  highest  and  low- 
est relative  prices 

Average  change  from  year  to  year . . . 


113 
112 
106 
106 
96 

94 
90 
90 

93 
102 
III 
109 
"3 
114 
113 
116 
123 
130 
122 
125 
130 
126 
130 
130 


100 
118 
129 


-23 
+40 
-  8 
+  8 


40 
4.0 


114 

"3 
106 

105 
96 

93 

89 

89 

93 

103 

III 

no 

114 

114 

114 

116 

122 

130 
121 

124 

131 
130 

134 
131 


114 

114 

105 

105 

94 

94 

87 

89 

95 

103 

112 

109 

116 

115 
116 
118 
123 
132 

125 

132 

135 
129 
138 
138 


113 
114 

los 

lOI 

93 
95 
88 

89 

95 

io8 

115 
116 
122 
118 
118 
122 
128 
138 
129 

135 
141 

135 
142 

139 


100 
118 
132 


-25 
+41 
-  9 
+  13 


45 
4.1 


100 
120 
135 


-27 
+45 
-  7 
+  13 


51 
4.9 


100 
124 
139 


-25 
+50 
-  9 
+  13 


54 
5-5 


"5 

112 

103 

103 

92 

95 

88 

90 

96 

107 

113 
III 
116 
118 
122 
123 
130 
132 
124 
133 
133 
129 
140 
142 


100 
122 
136 


-27 

+44 
-  8 
+  16 


54 
5-0 


113 

118 

112 

107 

96 

93 

85 

84 

90 

103 

109 

107 

117 

117 

no 

115 
122 
132 
122 
128 
134 
131 
138 
133 


100 
118 
134 


-28 

+47 
—  10 
+16 


54 
6.2 


76  BUSINESS  STATISTICS 

of  the  sets  including  only  25  commodities  would  serve  that 
limited  purpose  as  well  as  the  set  containing  nearly  ten  times 
as  many  commodities,  though  doubtless  the  longer  lists  would 
command  more  confidence. 

But  the  very  success  with  which  index  numbers,  even  when 
made  from  scanty  and  dissimilar  data,  bring  out  the  broader 
features  of  price  movements  encourages  one  to  hope,  from  this 
device,  for  more  than  an  indication  of  the  direction  and  a  rough 
approximation  to  the  degree  of  change.  Instead  of  concluding 
that  an  easy  compilation,  based  on  a  few  series  of  quotations 
"  will  do,"  we  may  hope  that  careful  work  covering  a  wide  field 
will  enable  us  to  improve  upon  our  first  results  and  attain 
measurements  that  have  a  narrow  margin  of  error. 

When  we  make  these  more  exacting  demands  upon  our  six  index 
numbers  we  attach  importance  to  the  fact  that  their  general 
similarity  does  not  preclude  numerous  differences  of  detail.  For 
example,  two  series  indicate  that  prices  rose  in  1891,  one  indicates 
that  prices  did  not  change,  and  three  indicate  a  fall;  three  put 
the  lowest  point  in  1896,  one  in  1897,  and  two  make  the  price 
level  the  same  in  these  years;  one  series  shows  a  rise  in  1901, 
five  show  a  fall;  in  1913  again  one  series  indicates  a  rise  of  prices, 
three  indicate  a  fall,  and  two  indicate  no  change;  the  general 
level  of  prices  in  the  final  year  is  made  to  vary  between  an  average 
rise  of  30  per  cent  and  one  of  42  per  cent  above  the  level  of  1890- 
1899;  there  is  also  a  difference  in  steadiness,  the  small  series 
fluctuating  through  a  wider  range  than  the  large  ones,  etc. 

To  what  are  these  discrepancies  due  ?  Are  they  discreditable 
to  the  large  series,  or  to  the  small  ones,  or  to  neither  set  ?  Can 
they  be  accounted  for  except  as  the  results  of  random  differences 
in  sampling  ? 

If  an  index  number  made  from  the  wholesale  prices  of  25,  or  50, 
or  250  commodities  can  measure  approximately  the  changes  in  all 
wholesale  prices,  it  must  be  because  the  known  fluctuations  in 
the  prices  of  these  selected  commodities  are  fair  samples  of  the 
unknown  fluctuations  in  the  prices  of  the  vastly  larger  number  of 
other  commodities  for  which  quotations  are  not  collected.  Now 
if  (i)  the  price  fluctuations  of  each  commodity  that  is  bought  and 


STATISTICAL  METHODS  J  J 

sold  were  strictly  independent  of  the  price  fluctuations  of  every 
other  commodity,  and  if  (2)  each  commodity  had  just  the  same 
importance  as  an  element  in  the  general  system  of  prices  as  every 
other  commodity,  then  any  series  of  price  quotations  collected  at 
random  would  be  a  fair  sample  for  determining  the  average 
changes  in  the  wholesale  prices  of  commodities  in  general.  Of 
course,  the  larger  the  number  of  commodities  included,  the  more 
trustworthy  would  be  the  index  number.  In  Table  III,  for  ex- 
ample, the  first  index  number  would  be  adjudged  the  best,  and 
the  divergencies  between  it  and  its  fellows  would  be  held  to  result 
from  the  scantier  material  from  which  the  latter  are  made. 

In  fact,  however,  the  situation  is  by  no  means  so  simple, 
because  neither  of  the  above-mentioned  conditions  holds  true. 
Commodities  are  far  from  being  all  of  the  same  importance  as 
elements  in  the  whole  system  of  prices.  With  the  complications 
arising  from  this  fact  the  section  on  the  problems  of  weighting 
will  deal.  Neither  are  the  price  fluctuations  of  different  commod- 
ities independent  of  each  other.  On  the  contrary,  the  price 
changes  of  practically  every  commodity  in  the  markets  of  the 
whole  country  are  causally  related  to  the  changes  in  the  prices  of 
a  few  or  of  many,  perhaps  in  the  last  resort  of  all  other  commod- 
ities that  are  bought  and  sold.  Most  of  these  relations  are  so 
slight  that  they  cannot  be  traced  by  statistical  methods.  But 
certain  bonds  are  so  close  and  so  strong  that  they  estabUsh 
definite  groups  of  related  prices  which  fluctuate  in  harmony  with 
one  another  and  which  differ  in  definable  ways  from  the  fluctua- 
tions of  other  such  groups.  The  present  task  is  to  show  the  exist- 
ence of  these  groups  and  the  effects  which  they  exercise  upon 
index  numbers. 

First,  the  price  fluctuations  of  a  raw  material  are  usually 
reflected  in  the  prices  of  its  manufactured  forms.  Hence  to  quote 
in  some  cases  both  the  raw  material  and  several  of  its  finished 
products,  and  to  quote  in  other  cases  the  raw  material  alone, 
assigns  certain  groups  of  related  prices  a  larger  influence  upon  the 
results  than  is  assigned  the  other  groups.  When  the  aim  is  to 
secure  a  set  of  samples  which  fairly  represent  price  fluctuations  as 
a  whole,  the  existence  of  these  groups  must  be  taken  into  account. 


78  BUSINESS  STATISTICS 

Neglect  on  this  score  may  give  a  misleading  twist  to  the  final  index 
numbers.  A  celebrated  case  in  point  is  that  of  the  Economist 
index  number  in  1 863-1 865.  Out  of  the  22  commodities  included 
in  the  Economist's  list  as  then  constituted  4  consisted  of  cotton 
and  its  products.  Hence  when  the  blockade  of  Southern  ports 
during  the  Civil  War  raised  the  price  of  cotton,  the  Economist 
index  numbers  grossly  exaggerated  the  average  rise  in  the  price 
level,  as  appears  from  the  following  comparison  between  the 
Economist's  results  for  1 860-1 865  and  the  corresponding  English 
figures  compiled  by  Sauerbeck:  ^ 

Economist  Sauerbeck's 

index  number  index  number 
Year                                         (prices  in  (prices  in 

i860  =  100)  i860  =  100) 

i860 100  100 

1861 102  100 

1862 109  106 

1863 136  109 

1864 145  112 

1865 136  106 

Directly  opposing  the  relations  which  unite  the  prices  of 
finished  goods  with  the  prices  of  their  raw  materials  is  a  second 
set  of  influences  which  make  the  price  fluctuations  of  manufac- 
tured goods  considered  as  a  group  characteristically  different 
from  the  price  fluctuations  of  their  raw  materials  considered  as  a 
separate  group.  Table  IV  presents  several  sets  of  index  numbers 
designed  to  throw  these  characteristic  differences  into  high  relief. 
The  first  two  columns  compare  the  relative  prices  of  the  49  raw 
materials  quoted  by  the  Bureau  of  Labor  Statistics  and  of  the 
183  to  193  more  or  less  manufactured  commodities  in  its  list. 
The  second  pair  of  columns  contains  index  nimibers  made  from 
the  prices  of  20  raw  materials  and  of  20  products  manufactured 
from  these  same  materials.  Then  come  three  columns  giving 
index  numbers  made  from  the  prices  of  five  great  staples  at  three 
successive  stages  of  manufacture:  Wheat,  flour,  and  bread; 
cotton,  cotton  yams,  and  cotton  textiles;  wool,  worsted  yarns, 

*  To  make  the  comparison  as  fair  as  possible,  both  series  are  here  given,  not  in 
their  original  form,  but  recomputed  on  a  common  basis.  See  Wholesale  Prices, 
Wages,  and  Transportation,  report  by  Mr.  Aldrich  from  the  Committee  on  Finance, 
March  3, 1893,  S2d  Cong.,  2d  sess.,  Senate  Report  No.  1394,  Part  I,  pp.  226  and  255. 


STATISTICAL  METHODS 


79 


saoqs 


'*^00000>0000'0>0>0>C>0>0>OPHMMiNi-iM<NfO 


8^^ 


1  +  1+     '^ 


jaq^Bai 


^  O  O  Oi  Ov  Oi  o 


>0  Ov  vo  O  r>. 

1  +  1  + 


sapiH 


8  51 


fOOO   <M    POOO 

I  +  I+" 


sioo?  pais 


I  +  I  I       -^ 


sianiq  pais 


'too    Tt  M    lO 

l     +     l        I 


uoji  3i  J 


l  +  l   I 


san? 
-xaj  najoo^ 


M   «    CI   QvO  00 


IHf«Ol>OTfM«rtO<*5fO 


M   vovo    W    M    Ol  >0  tT  M 
mOOmw'-'inmm 


I   to  CO        O* 

+  1+      "^ 


SOJ'BX  paisjOjW 


l  +  l!         « 


JOOM  MB-g 


M    M    Tt  to  W 
'O    lO  IHVO 

l  +  l  I 


S9irjx3?  uo;io3 


1  +  1  + 


sujbX  005503 


Ot  M  to  to  to 

•H    Tt  PI    M    •»*■ 
1    +    1    + 


U0550D  J&V^ 


6  coo 


+  I+' 


p^sjg 


<N|000000>0'000000 


MvO  o  O  O  toot 

O    O    *H    M    M    W    IH 


8  5r  o 
o  « 


+++ 


jnog  ;B3qA\ 


w  vO  'l'  000  'two  OiOO  OOt^Ot~»otMt^O>Oi  OivO  M  IN  Oi 

M    <N    O  00    t^OO    Oi>-lO000000O>O>f<<NOl0>HCONM<MO 


r^r^  Coo  COM 

O     M  to  M    M    H  VO 

2  -        I ++ I 


ITOqAV 


OiOO  «0  O   •*  O  >OvO  00  «o  rfyo   Oi  >O00  «00  w   N   O  »0   M   O 
M   M   O  Ov  t^OO  000   w   0»0>00i0   tOtoO  <M   too   ■*  to  Tj- 


•<tvO   M  >o 
CO  to  M 

I++I 


spooS  paqsTUT  J 


COS?    OtMlOOMTj-Ott^ 


to  O  >o  r~  CO 

M  CO  to       *1 

1  +  1+  '^ 


sjDnpojd 
a^Bipauuaini 


?^8^8s<^sas&2 


M   O    't  "O  >0  OivO   t^O    10  10  0»  Pt 


woo  Oi «o O 

CO  CO  t 

1  +  1  + 


si'Buai'Bxn  Mrjj 


OM  oOOOiocoO        ^ 

2>?    r+r+"  oi 


spooS 
pajnioBjnu'Bj^ 


O   Ovt^  ■*  to 

<N    CO  Tt 

1  +  1  + 


sjBua^Bai  Ai'B'}j 


1  Oi  OvoO  OOOvwMMMcviPic^co'tcOTt't-'l-vO' 


1  +  1  + 


s^Dnpojd  pajnj 
oBjnuBra  f6i  oj  fgi 


::^^ 


0  1^00  t^  Ov 
«  CO  CO 

1  +  1  + 


spus^Bm  J&vi  6t 


O  0>  OvOO  00  o>  ( 


H  Oi  0<  >0  w 
CO  1-  MVO 
1  +  1  + 


•SI 

3.2 
^^ 

tO>»   I 


?  >  « 


'qqoooooo'oow 

OiOOiOOiOiOiOiOOOi 


O  w  <M  CO        SJ 


Msilslllglll 

WMW,_^MHIMW  «(a 

°+(!)yl,^s:;'S 


So 


8o  BUSINESS  STATISTICS 

and  woolen  textiles;  pig  iron,  steel  billets,  and  steel  tools;  hides, 
leather,  and  shoes.  The  later  sections  of  the  table  give  the  data 
for  each  of  these  last-mentioned  groups  separately.  These  several 
comparisons  establish  the  conclusion  that  manufactured  goods 
are  steadier  in  price  than  raw  materials.  The  manufactured 
goods  fell  less  in  1 890-1 896,  rose  less  in  1 896-1 907,  again  fell  less 
in  1907-1908,  and  rose  less  in  1908-1913.  Further,  the  manu- 
factured goods  had  the  narrower  extreme  range  of  fluctuations, 
the  smaller  average  change  from  year  to  year,  and  the  slighter 
advance  in  price  from  one  decade  to  the  next.  It  follows  that 
index  numbers  made  from  the  prices  of  raw  materials,  or  of  raw 
materials  and  sKghtly  manufactured  products,  must  be  expected 
to  show  wider  oscillations  than  index  niunbers  including  a  liberal 
representation  of  finished  commodities. 

Third,  there  are  characteristic  differences  among  the  price 
fluctuations  of  the  groups  consisting  of  mineral  products,  forest 
products,  animal  products,  and  farm  crops.  Table  V  presents 
index  numbers  for  these  four  groups.  Fifty-seven  commodities 
are  included,  all  of  them  raw  materials  or  slightly  manufactured 
products.^  Here  the  striking  feature  is  the  capricious  behavior  of 
the  prices  of  farm  crops  under  the  influence  of  good  and  bad 
harvests.  The  sudden  upward  jump  in  their  prices  in  1891, 
despite  the  depressed  condition  of  business,  their  advance  in  the 
duU  year  1904,  their  fall  in  the  year  of  revival  1905,  their  failure 
to  advance  in  the  midst  of  the  prosperity  of  1906,  their  trifling 
decHne  during  the  great  depression  of  1908,  and  their  sharp  rise 
in  the  face  of  reaction  in  19 11  are  all  opposed  to  the  general  trend 
of  other  prices.  The  prices  of  animal  products  are  distinctly  less 
affected  by  weather  than  the  prices  of  vegetable  crops,  but  even 
they  behave  queerly  at  times,  for  example  in  1893.  Forest- 
product  prices  are  notable  chiefly  for  maintaining  a  much  higher 
level  of  fluctuation  in  1902-1913  than  any  of  the  other  groups,  a 
level  on  which  their  fluctuations,  when  computed  as  percentages 
of  the  much  lower  prices  of  1890-1899,  appear  extremely  violent. 
Finally,  the  prices  of  minerals  accord  better  with  alternations  of 

1  For  list  see  Bulletin  of  the  United  States  Bureau  of  Labor  Statistics,  No.  173, 
p.  58.     [Editor.] 


STATISTICAL  METHODS 


8l 


Table  V.    Index  Numbers  made  from  Prices  of  Mh^ral,  Forest,  Animal, 
AND  Farm  Products,  by  Years,  1890  to  1913. 

[Data  from  the  Bulletin  of  the  Bureau  of  Labor  Statistics,  No.  149] 
(Arithmetic  means.    Average  prices  in  1890-1899  =  100) 


Year 


Mineral 

Forest 

Animal 

products 

products 

products 

19 

10 

10 

119 

107 

106 

III 

lOS 

108 

105 

99 

109 

98 

98 

116 

87 

95 

94 

91 

96 

95 

92 

94 

82 

88 

95 

88 

92 

99 

97 

117 

112 

105 

120 

121 

III 

113 

113 

112 

119 

123 

128 

124 

137 

117 

"5 

142 

"3 

123 

149 

121 

ns 

163 

128 

137 

169 

135 

118 

151 

126 

121 

164 

144 

120 

181 

152 

120 

172 

131 

132 

168 

146 

136 

169 

150 

100 

100 

100 

123 

143 

124 

127 

173 

145 

-27 

-13 

-24 

+45 

+  75 

+53 

-19 

-18 

-  9 

+  18 

+  18 

+  24 

50 

87 

70 

7.0 

7-4 

8.9 

Farm 
crops 


Number  of  commodities  included 

1890 

1891 

1892 

1893 i 

1894 

1895 

1896 

1897 

1898 

1899 

1900 

1901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

1911 

1912 

1913 

Averages,  1890-1899 

1900-1909 , 

1910-1913 

Niunber  of  points  by  which  prices  rose  (+) 
or  feU  (— )  in  — 

1890-1896 

1896-1907 

1907-1908 

1908-1913 

Difference  between  highest  and  lowest  rela- 
tive prices 

Average  change  from  year  to  year 


18 
119 
126 
no 
105 

lOI 

92 
76 
83 

92 

96 

105 
114 

120 

116 
124 
116 
116 
125 
124 
130 
134 
151 
158 

135 


100 

119 

I4S 


-43 
+49 
—  I 

+  11 

82 
8.2 


82  BUSINESS  STATISTICS 

prosperity,  crisis,  and  depression  than  any  of  the  other  groups. 
And  the  anomaKes  that  do  appear  —  the  slight  rise  in  three  years 
(1896,  1903,  and  1913)  when  the  tide  of  business  was  receding  — • 
would  be  removed  if  the  figures  were  compiled  by  months.  For 
the  trend  of  mineral  prices  was  downward  in  these  years,  but  the 
fall  was  not  so  rapid  as  the  rise  had  been  in  the  preceding  years, 
so  that  the  annual  averages  were  left  somewhat  higher  than 
before.  An  index  number  composed  largely  of  quotations  for 
annual  crops,  then,  would  be  expected  at  irregular  intervals 
to  contradict  capriciously  the  evidence  of  index  numbers  in 
which  most  of  the  articles  were  mineral,  forest,  or  even  animal 
products. 

Fourth,  there  are  characteristic  differences  between  the  price 
fluctuations  of  manufactured  commodities  bought  by  consumers 
for  family  use  and  the  price  fluctuations  of  manufactured  com- 
modities bought  by  business  men  for  industrial  or  commercial  use. 
Such  at  least  is  the  story  told  by  Table  VI.  The  data  employed 
here  are  quotations  for  28  articles  from  the  Bureau  of  Labor 
Statistics'  list  that  rank  distinctly  as  consumers'  goods  and  28 
that  rank  as  producers'  goods.  Though  consisting  more  largely 
of  the  erratically  fluctuating  farm  products,  the  consmners' 
goods  are  steadier  in  price  than  the  producers'  goods,  because  the 
demand  for  them  is  less  influenced  by  changes  in  business 
conditions. 

Other  groups  of  related  prices  having  specific  peculiarities  of 
fluctuation  doubtless  exist,  but  the  analysis  has  been  carried  far 
enough  for  the  present  purpose.  That  purpose  is  to  show  how  the 
existence  of  groups  of  prices  which  fluctuate  in  harmony  with  each 
other  and  at  variance  with  other  groups  affects  index  numbers  in 
general  and  in  particular  the  six  index  numbers  for  the  United 
States  given  in  Table  III.  To  apply  the  knowledge  gained  from 
the  preceding  analysis  to  the  explanation  of  the  differences  among 
these  six  index  numbers  is  not  difficult  when  once  the  conwnodities 
included  in  each  index  number  have  been  classified  on  the  basis  of 
the  groups  which  have  been  examined. 

First,  the  list  of  commodities  used  by  the  Bureau  of  Labor  Sta- 
tistics includes  29  quotations  for  iron  and  its  products,  30  quota- 


STATISTICAL  METHODS 


83 


Table  VI.    Index  Numbers  made  from  Prices  of  Consumers'  Goods  and 
Producers*  Goods,  by  Years,  1890  to  1913. 

[Data  from  Bulletin  of  the  Bureau  of  Labor  Statistics,  No.  149] 

(Arithmetic  means.    Average  prices  in  1 890-1899  =  100) 


Year 


Consum- 
ers' 
goods 


Produc- 
ers' 


1890 

1891 

1892 

1893 • 

1894 

1895.  .• 

1896 

1897 

1898 

1899 

1900 

I901 

1902 

1903 

1904 

1905 

1906 

1907 

1908 

1909 

1910 

1911 

191 2 

I9I3 

Averages,  1890-1899 

1900-1909 

1910-1913 

Number  of  points  by  which  prices  rose  (+)  or  fell  (— )  in 

1890-1897 " 

1897-1907 

1907-1908 

1908-1913 

Difference  between  highest  and  lowest  relative  prices . . . . 

Average  change  from  year  to  year 


112 

109 

104 

108 

100 

95 

91 

90 

94 

98 

106 

los 

108 

loS 
103 
106 
no 
114 
112 
114 
118 
119 
118 
121 


IIS 

III 

107 

102 

92 

91 

93 

89 

93 

107 

117 

113 
114 

114 
114 
117 
124 
133 
119 


84  BUSINESS  STATISTICS 

tions  for  cotton  and  its  products,  and  i8  for  wool  and  its  products, 
besides  8  more  quotations  for  fabrics  made  of  wool  and  cotton 
together.  On  the  other  hand  it  has  but  7  series  for  wheat  and  its 
products,  8  for  coal  and  its  products,  3  for  copper  and  its  products, 
etc.  The  iron,  cotton,  and  wool  groups  together  make  up  85 
series  out  of  242,  or  35  per  cent  of  the  whole  number.  The  same 
three  groups  furnish  36  (or  25  per  cent)  of  the  145  series  in  the 
second  index  number  in  Table  III.  Similarly,  cotton,  wool,  and 
wheat,  or  coal,  or  cattle,  with  their  products,  make  20  per  cent  of 
the  series  in  the  third  index  number. 

Does  this  large  representation  of  three  staples  distort  these 
index  numbers  —  particularly  the  bureau's  series  where  the  dis- 
proportion is  greatest  ?  Perhaps;  but  if  so  the  distortion  does 
not  arise  chiefly  from  the  undue  influence  assigned  to  the  price 
fluctuations  of  raw  cotton,  raw  wool,  and  pig  iron.  For,  contrary 
to  the  prevailing  impression,  the  similarity  between  the  price 
fluctuations  of  finished  products  and  their  raw  materials  is  less 
than  the  similarity  between  the  price  fluctuations  of  finished 
products  made  from  different  materials.  Such  at  least  is  the  testi- 
mony of  Table  IV.  As  babies  from  different  families  are  more  like 
one  another  than  they  are  like  their  respective  parents,  so  here 
the  relative  prices  of  cotton  textiles,  woolen  textiles,  steel  tools, 
bread,  and  shoes  differ  far  less  among  themselves  than  they  differ 
severally  from  the  relative  prices  of  raw  cotton,  raw  wool,  pig 
iron,  wheat,  and  hides.  Hence  the  inclusion  of  a  large  number  of 
articles  made  from  iron,  cotton,  and  wool  affects  an  index  number 
mainly  by  increasing  the  representation  allotted  to  manufactured 
goods.  What  materials  those  manufactured  goods  are  made  from 
makes  less  difference  in  the  index  number  than  the  fact  that  they 
are  manufactured.  To  replace  iron,  cotton,  and  woolen  products 
by  copper,  linen,  and  rubber  products  would  change  the  results 
somewhat,  but  a  much  greater  change  would  come  from  replacing 
the  manufactured  forms  of  iron,  cotton,  and  wool  by  new  varieties 
of  their  raw  forms. 

Two  practical  conclusions  of  moment  to  both  the  makers  and 
the  users  of  index  numbers  are  established  by  this  section,  (i)  To 
make  aa  index  number  that  measures  the  changes  in  wholesale 


STATISTICAL  METHODS  85 

prices  at  large,  samples  must  be  drawn  from  all  the  various  groups 
that  behave  in  peculiar  ways.  (2)  In  using  an  index  number  made 
by  others,  one  must  study  the  list  of  commodities  included  criti- 
cally with  these  groups  in  mind  to  know  what  it  really  does 
measure. 

The  first  conclusion  seems  to  contradict  a  rule  often  practiced 
and  sometimes  preached.  Most  of  the  middle-sized  index  num- 
bers are  confined  to  raw  materials  and  slightly  manufactured 
goods.  Most  of  the  small  index  numbers  are  confined  to  foods 
alone.  The  makers  of  both  sets  argue  that  their  series  are  more 
"  sensitive  "  and  therefore  better  measures  of  price  changes  than 
the  larger  series,  which  are  loaded  down  with  a  mass  of  miscella- 
neous manufactured  goods.  And  many  users  of  index  munbers 
seem  to  prefer  a  series  like  Sauerbeck's  with  only  45  commodities, 
or  even  one  like  the  Annalist's  with  only  25  commodities,  to  one 
like  that  of  the  Bureau  of  Labor  Statistics  with  five  or  ten  times 
the  number. 

Critics  who  take  this  stand  usually  assume  tacitly  that  the  pur- 
pose of  an  index  number  is  to  serve  as  a  "  business  barometer,"  or 
to  measure  changes  in  "  the  cost  of  living."  If  these  aims  were 
always  clearly  realized  by  the  critics  and  clearly  stated  for  their 
readers  the  room  left  for  differences  of  opinion  would  be  narrow. 
In  Table  III  the  index  number  with  145  commodities  shows  itseK 
a  more  sensitive  and  on  the  whole  more  faithful  barometer  of 
changing  business  conditions  during  the  24-year  period  from  1890 
to  1913  than  the  official  series  with  242  commodities,^  and  the 
preceding  analysis  shows  that  the  sluggishness  of  the  larger  index 
number  is  due  chiefly  to  its  proportion  of  manufactured  goods. 
For  this  particular  purpose,  then,  a  series  modeled  after  Sauer- 
beck's has  strong  claims  to  preference  over  one  including  a  larger 
number  of  commodities.  Indeed,  in  the  light  of  the  preceding 
discussion  one  might  carry  the  process  of  exclusion  much  further 
and  throw  out  of  the  business  barometer  not  only  manufactured 
goods  but  also  all  farm  crops,  on  the  ground  that  their  prices 
depend  on  the  eccentricities  of  the  weather,  and  most  forest  prod- 
ucts, on  the  ground  that  their  prices  are  rising  so  fast  as  to 
^  Compare  page  97. 


86  BUSINESS  STATISTICS 

obscure  the  effects  of  bad  times,  etc.  But  clearly  such  exclusions, 
while  they  might  make  the  resulting  figures  more  responsive  to 
changes  in  business  conditions,  would  also  make  the  figures  less 
acceptable  as  a  measure  of  changes  in  prices  as  a  whole.  The 
sluggish  movements  of  manufactured  goods  and  of  consumers' 
commodities  in  particular,  the  capricious  jumping  of  farm  prod- 
ucts, the  rapidly  increasing  dearness  of  lumber,  etc.,  are  all  part 
and  parcel  of  the  fluctuations  which  the  price  level  is  actually 
undergoing.  Consequently,  an  index  number  which  pretends  to 
measure  changes  in  the  general  level  of  prices  cannot  logically 
reject  authentic  quotations  from  any  of  these  groups.  Every 
restriction  in  the  scope  of  the  data  implies  a  limitation  in  the 
significance  of  the  results. 

Probably  the  most  illuminating  way  of  presenting  an  index 
number  that  aspires  to  cover  the  whole  field  of  prices  at  wholesale 
would  be  to  publish  separate  results  for  the  groups  that  have 
characteristic  differences  of  price  fluctuations,  and  then  to  publish 
also  a  grand  total  including  all  the  groups.  The  groups  to  be 
recognized  and  the  distribution  of  commodities  among  them  is  a 
difficult  matter  to  decide.  Doubtless  intensive  research  along  the 
lines  here  followed  would  suggest  the  desirability  of  further  sub- 
divisions and  perhaps  the  re-alignment  of  the  whole  classification. 
But,  as  matters  stand,  the  most  significant  arrangement  seems  to 
be  (i)  a  division  of  all  commodities  into  raw  and  manufactured 
products;  (2)  the  subdivision  of  raw  commodities  into  farm  crops 
and  animal,  forest,  and  mineral  products;  (3)  the  subdivision  of 
manufactured  products  according  as  they  are  bought  mainly  for 
personal  consumption,  mainly  for  business  use,  or  largely  for  both 
purposes.  It  would  also  be  interesting  in  a  supplementary  table 
to  bring  together  index  numbers  for  the  leading  raw  materials  and 
the  products  manufactured  from  them. 

This  classification  is  based  upon  differences  among  the  factors 
affecting  the  supply  of  and  the  demand  for  commodities  that 
belong  to  the  several  groups  —  that  is,  upon  differences  among 
the  factors  which  determine  prices.  If  we  wish  our  index  numbers 
to  help  tcfward  an  understanding  of  changes  in  the  price  level,  a 
classification  along  these  causal  lines  promises  the  most  illumi- 


STATISTICAL  METHODS  87 

nating  results;  but  it  is  not  the  basis  of  classification  usually 
adopted. 

In  most  large  index  numbers  the  commodities  are  divided 
among  several  classes,  but  these  classifications  seldom  possess 
logical  consistency.  Among  the  nine  groups  recognized  by  the 
Bureau  of  Labor  Statistics,  for  example,  one  group,  "Farm  prod- 
ucts,'' emphasizes  the  place  of  production;  four  groups,  "  Food, 
etc.,"  "  Fuel  and  lighting,"  "  Lumber  and  building  materials," 
and  "  House-furnishing  goods,"  emphasize  the  use  to  which  com- 
modities are  put;  three  groups  apply  a  double  criterion,  use  and 
physical  character  of  the  goods,  namely,  "  Cloths  and  clothing  " 
(which  includes  such  articles  as  2-bushel  bags),  "  Metals  and 
implements,"  and  "  Drugs  and  chemicals  ";  the  remaining  group 
is  frankly  styled  ''  Miscellaneous."  Such  a  classification  is  not 
without  usefulness,  for  there  doubtless  are  readers  especially 
interested  in  the  prices  of,  say,  all  things  that  are  raised  on  farms, 
and  others  who  care  especially  about  the  prices  of  things  used  to 
furnish  houses,  or  things  that  can  be  classed  together  as  drugs  and 
chemicals  whether  they  are  used  chiefly  as  medicines  or  to  make 
farm  fertilizers.  But  if  a  classification  of  this  empirical  character 
is  maintained,  it  might  with  advantage  be  accompanied  by  a 
classification  that  throws  more  light  upon  the  workings  of  the 
complex  system  of  prices. 

As  for  the  small  series  made  from  the  prices  of  foods  alone  or 
from  the  prices  of  any  single  group  of  commodities,  it  is  clear  that, 
however  good  for  special  uses  they  may  be,  they  are  untrust- 
worthy as  general-purpose  index  numbers. 

A  food  index  number,  then,  is  likely  at  any  time  to  give  a 
wrong  impression  regarding  the  shifting  of  prices  in  general  and 
is  especially  treacherous  as  a  business  barometer.  Nor  can  such 
an  index  when  made  from  wholesale  prices  be  trusted  to  show 
changes  in  the  "  cost  of  living  ";  for  living  expenses  are  made  up 
of  retail  prices,  and  fluctuations  in  retail  prices  do  not  follow 
closely  those  in  the  wholesale  markets. 

The  second  conclusion  which  this  section  establishes  is  that 
large  index  numbers  are  more  trustworthy  for  general  purposes 
than  small  ones,  not  only  in  so  far  as  they  include  more  groups  of 


88  BUSINESS  STATISTICS 

related  prices,  but  also  in  so  far  as  they  contain  more  numerous 
samples  from  each  group.  What  is  characteristic  in  the  behavior 
of  the  prices  of  farm  crops,  of  mineral  products,  of  manufactured 
wares,  of  consumers'  goods,  etc.  —  what  is  characteristic  in  the 
behavior  of  any  group  of  prices  —  is  more  Hkely  to  be  brought  out 
and  to  exercise  its  due  effects  upon  the  final  results  when  the 
group  is  represented  by  lo  or  20  sets  of  quotations  than  when  it  is 
represented  by  only  one  or  two  sets.  The  basis  of  this  contention 
is  simple:  In  every  group  that  has  been  studied  there  are  certain 
commodities  whose  prices  seldom  behave  in  the  typical  way,  and 
no  commodities  whose  prices  can  be  trusted  always  to  behave 
typically.  Consequently,  no  care  to  include  commodities  belong- 
ing to  all  the  important  groups  can  guarantee  accurate  results, 
unless  care  is  also  taken  to  get  numerous  representatives  of  each 
group. 

Even  here  the  matter  does  not  end.  The  different  groups  that 
have  been  discussed,  the  other  groups  that  might  have  been  dis- 
cussed, and  the  commodities  that  are  included  within  the  several 
groups  differ  widely  in  importance  as  elements  in  the  system  of 
prices.  To  these  differences,  and  to  the  methods  of  making  them 
coimt  in  index  niunbers,  we  must  now  turn. 

Problems  of  Weighting 

It  is  customary  to  distinguish  sharply  between  "  simple  "  and 
"  weighted  "  index  numbers.  When  an  effort  is  made  to  ascertain 
the  relative  importance  of  the  various  commodities  included,  and 
to  apply  some  plan  by  which  each  commodity  shall  exercise  an 
influence  upon  the  final  results  proportionate  to  its  relative 
importance,  the  index  number  is  said  to  be  weighted.  When,  on 
the  contrary,  no  such  effort  is  made,  but  every  commodity  is 
taken  just  as  it  comes  and  supposedly  allowed  just  the  same 
chance  to  influence  the  result  as  every  other  commodity,  the  index 
number  is  said  to  be  unweighted,  or  simple. 

In  unweighted  series,  however,  it  is  seldom  true  that  every  com- 
modity has  just  the  same  chance  to  influence  the  result  as  every 
other  commodity.  For  example,  in  Bradstreet's  index  the 
influence  of  every  article  upon  the  result  varies  as  its  price  per 


STATISTICAL  METHODS  89 

pound  happens  to  be  large  or  small.  Again,  the  decisive  objec- 
tion to  making  index  numbers  by  merely  adding  the  ordinary 
commercial  quotations  for  different  articles  is  that  these  nomi- 
nally simple  series  are  in  fact  viciously  weighted  series.  Nor 
does  the  substitution  of  relative  prices  for  actual  prices  assure  an 
equal  chance  to  every  article.  For  instance,  in  its  famous  report 
of  1893,  the  Senate  Committee  on  Finance  presented  three  whole- 
sale-price index  numbers  —  one  simple  and  two  weighted;  but  in 
the  simple  series  it  included  relative  prices  for  25  different  kinds 
of  pocket-knives,  giving  this  trifling  article  an  influence  upon  the 
result  more  than  eight  times  greater  than  that  given  to  wheat, 
com,  and  coal  put  together.  Finally,  even  if  one  series  of  relative 
prices,  and  only  one,  be  accorded  each  commodity,  it  does  not 
follow  that  equal  percentages  of  change  in  the  price  of  every 
article  will  always  exercise  equal  influence  upon  the  results.  For, 
as  shown  above,  when  the  relative  prices  are  computed  upon  a 
fixed  base  and  averaged  by  the  use  of  arithmetic  means,  those 
commodities  that  have  a  long  period  upward  trend  in  price  will 
presently  far  outweigh  in  influence  those  commodities  whose 
prices  are  declining. 

Lack  of  attention  to  weighting,  then,  does  not  automatically 
secure  a  fair  field  and  no  favor  to  every  commodity;  on  the  con- 
trary, it  results  in  what  Walsh  happily  termed  haphazard  weight- 
ing.* Indeed,  when  it  is  desired  to  give  each  commodity  an  equal 
chance  to  influence  the  results,  great  care  must  be  taken;  practi- 
cally a  scheme  of  equal  weights  must  be  devised.  The  real 
problem  for  the  maker  of  index  numbers  is  whether  he  shall  leave 
weighting  to  chance  or  seek  to  rationalize  it. 

There  are  two  excuses  for  neglect  of  weighting.  First,  as  has 
been  shown  in  another  connection,  to  collect  satisfactory  statis- 
tics showing  the  relative  importance  of  different  commodities  is 

^  C.  M.  Walsh,  The  Measurement  of  General  Exchange-Valiie,  pp.  81  and  82. 
Haphazard  weighting  is  not  necessarily  the  worst  weighting;  indeed,  it  often  is 
better  than  the  weighting  which  results  from  some  systematic  calculations.  For 
example,  Bradstreet's  plan  of  using  actual  prices  per  pound  is  certainly  systematic, 
but  the  weighting  which  this  system  involves  is  probably  less  defensible  than  the 
haphazard  weighting  involved  in  most  averages  of  the  relative  prices  of  commodi- 
ties selected  at  random.    See  p.  95. 


90  BUSINESS  STATISTICS 

extremely  laborious  and  extremely  difficult.  Second,  there  are 
high  authorities  who  hold  that  the  results  turn  out  much  the  same 
whether  or  not  formal  weights  are  used.^  Certainly  "  the  weights 
are  of  much  less  importance  in  determining  an  index  number  to 
prices  than  the  prices  themselves."  *  But  whether  their  impor- 
tance is  negligible  is  a  question  best  answered  by  a  study  of  actual 
cases.^ 

The  discrepancies  here  revealed  between  the  averages  with  hap- 
hazard and  with  systematic  weights  seldom  amount  to  lo  per 
cent  of  the  results,  except  under  the  chaotic  price  conditions 
created  by  the  greenback  standard  in  1862-1873.  In  many  kinds 
of  statistics  a  10  per  cent  margin  of  error  is  not  accounted  large. 
But  in  making  wholesale-price  index  numbers  for  current  years 
we  may  reasonably  try  to  get  not  two,  but  three,  significant 
figures;  and  the  third  figure  is  usually  altered  in  appreciable 
degree  by  the  substitution  of  systematic  for  haphazard  weights. 
Even  the  large  Canadian  series,  with  its  272  commodities,  is 
shifted  9.5  points,  or  more  than  7  per  cent,  in  191 2  by  weighting. 

If  rational  weighting  is  worth  striving  after,  then,  by  what 
criterion  shall  the  relative  importance  of  the  different  commodities 
be  judged  ?  That  depends  upon  the  object  of  the  investigation. 
If,  for  example,  the  aim  be  to  measure  changes  in  the  cost  of 
living,  and  the  data  be  retail  quotations  of  consumers'  commod- 
ities, then  the  proportionate  expenditures  upon  the  different 
articles  as  represented  by  collections  of  family  budgets  make 
appropriate  weights.  If  the  aim  be  to  study  changes  in  the  money 
incomes  of  farmers,  then  the  data  should  be  "  farm  prices,"  the 
list  of  commodities  should  be  limited  to  farm  products,  and  the 
weights  should  be  proportionate  to  the  monetary  receipts  from 
the  several  products.  If  the  aim  be  to  construct  a  business 
barometer,  the  data  should  be  prices  from  the  most  representa- 
tive wholesale  markets,  the  list  should  be  confined  to  commodities 
whose  prices  are  most  sensitive  to  changes  in  business  prospects 

^  Compare  A.  L.  Bowley,  Elements  of  Statistics,  2d  ed.,  pp.  113  and  220-224. 

2  Irving  Fisher,  The  Purchasing  Power  of  Money,  revised  edition,  p.  406.  For 
further  details  see  the  papers  by  Edgeworth  to  which  Fisher  refers  in  his  footnote. 

'  An  illustrative  table  is  given  on  pp.  74-75,  Bulletin  of  the  United  States  Bureau 
of  Labor  Statistics,  No.  173.      [Editor.] 


STATISTICAL  METHODS  9 1 

and  least  liable  to  change  from  other  causes,  and  the  weights  may 
logically  be  adjusted  to  the  relative  importance  of  the  commodi- 
ties as  objects  of  investment.  If  the  aim  be  merely  to  find  the 
differences  of  price  fluctuation  characteristic  of  dissimilar  groups 
of  commodities,  or  to  study  the  influence  of  gold  production  or  the 
issue  of  irredeemable  paper  money  upon  the  way  in  which  prices 
change,  it  may  be  appropriate  to  give  identical  weights  to  all  the 
commodities.  If,  on  the  other  hand,  the  aim  be  to  make  a  general- 
purpose  index  number  of  wholesale  prices,  the  question  is  less 
easy  to  answer. 

One  proposition,  however,  is  clear.  The  prevalent  practice  of 
weighting  wholesale-price  index  numbers  by  figures  drawn  from 
family  budgets  is  to  be  deprecated.  For  family  budgets  do  not 
show  the  importance  of  wheat  and  cotton,  of  petroleum  and 
spelter,  of  tar  and  lime,  of  pig  iron  and  hides,  of  brick  and  lumber; 
indeed,  to  apply  budget  weights  to  half  or  more  of  the  articles  in 
any  wholesale  list  is  impossible,  or  at  best  nonsensical.  And  to 
pretend  that  wholesale-price  index  numbers  when  weighted  on  the 
basis  of  family  expenditures  show  fluctuations  in  the  cost  of 
living  is  to  overtax  the  credulity  of  those  who  know  and  to  abuse 
the  confidence  of  those  who  do  not. 

Allied  to  the  family-budget  method  of  weighting  and  yet  vastly 
better  for  wholesale-price  index  numbers  is  the  "  aggregate 
expenditure  "  method.  Here  an  attempt  is  made  to  ascertain 
the  aggregate  sums  of  money  laid  out  by  the  people  of  a  whole 
country  upon  the  articles  quoted  and  to  adjust  their  weights  upon 
this  basis.  Of  course  the  country  as  a  whole  buys  raw  materials, 
as  single  families  do  not,  and  of  course  consumers'  commodities 
can  be  taken  at  their  aggregate  values  in  wholesale  markets. 
Similar  in  net  effect  is  the  weighting  on  the  basis  of  consumption 
practiced  by  the  British  Board  of  Trade.  For  "  consumption  is 
taken  to  mean  any  process  by  which  the  commodity  is  substan- 
tially changed  in  character.  In  other  words,  consumption  in 
manufacture  is  recognized  as  well  as  consumption  by  an  indi- 
vidual." 1    Somewhat  different  weights  would  result  if  quantities 

1  Report  on  Wholesale  and  Retail  Prices  in  the  United  Kingdom  in  1902.  Lon- 
don, 1903,  p.  441.    The  accuracy  of  the  statistics  upon  which  the  Australian  and 


92  BUSINESS  STATISTICS 

or  values  produced  were  taken  in  place  of  quantities  or  values 
consumed.  Mr.  Walsh  thinks  it  best  to  combine  these  two 
criteria  —  that  is,  to  take  "  either  the  total  product  or  the  total 
consumption  according  as  the  one  or  the  other  is  the  greater."  ^ 
Professor  Irving  Fisher  prefers  "an  index  number  in  which  every 
article  or  service  is  weighted  according  to  the  value  of  it  exchanged 
at  base  prices  in  the  year  whose  level  of  prices  it  is  desired  to 
find."  2  On  this  system  the  weight  assigned  to  each  article  would 
be  affected  by  the  number  of  times  it  changed  hands  on  its  way 
from  producer  to  final  consumer.  A  variation  of  his  plan  is  there- 
fore represented  by  the  proposal  to  weight  each  article  according 
to  the  quantity  of  it  which  enters  into  the  country's  commerce, 
irrespective  of  the  frequency  with  which  it  changes  hands. 

The  practical  consequences  of  adopting  these  different  systems 
of  weighting  may  be  illustrated  by  considering  their  application  to 
cotton,  com,  and  coffee  in  the  United  States.  Production  weights 
would  give  cotton  much  greater  importance  than  consumption  or 
aggregate-expenditure  weights,  because  so  large  a  part  of  the 
American  crop  is  exported  and  consumed  abroad.  Exchange 
weights  would  be  practically  equivalent  to  production  weights, 
because  practically  all  the  cotton  grown  is  sold  by  the  planters 
and  enters  into  the  commerce  of  the  country,  and  very  little 
cotton  is  imported.  On  Professor  Fisher's  plan,  however,  the  ex- 
change weights  would  be  some  multiple  of  the  production  weights, 
depending  upon  the  average  number  of  American  hands  through 
which  the  cotton  passed.  In  the  case  of  corn,  production  and 
consumption  weights  would  substantially  agree,  for  we  import 
very  little  com  and  export  but  a  very  small  percentage  of  the 
production.  On  the  other  hand,  exchange  weights  would  be  much 
less  than  either  production  or  consumption  weights,  because  a 
large  part  of  the  com  crop  is  never  sold,  but  is  consumed  on  the 
farms  where  it  is  grown.    In  the  case  of  coffee,  production  weights 

British  index  numbers  are  based  may  be  open  to  question.  Not  the  data,  but  the 
method  is  of  interest  here. 

1  C.  M.  Walsh,  The  Measurement  of  General  Exchange-Value.  New  York, 
1901,  p.  95. 

2  Irving  Fisher,  The  Purchasing  Power  of  Money,  revised  edition.  New  York, 
1913,  pp.  217  and  218. 


STATISTICAL  METHODS  93 

would  be  practically  zero,  while  consumption  and  exchange 
weights  would  correspond  closely. 

We  are  helped  toward  a  choice  among  these  rivals  by  common 
agreement  upon  a  slightly  different  point.  In  arranging  any  sys- 
tem of  weights  except  Professor  Fisher's,  double  counting  is  to  be 
avoided  so  far  as  possible.  For  example,  if  cotton  is  counted  at 
its  full  importance  as  a  raw  material,  then  cotton  yams  and  later 
cotton  fabrics  made  of  the  yarn  cannot  be  counted  at  their  full 
importance  without  assigning  triple  weight  to  the  raw  cotton 
which  is  represented  at  these  two  successive  stages  of  manu- 
facture. Now,  if  this  sensible  observation  be  applied  to  cases  like 
those  of  com,  hay,  etc.,  it  casts  the  die  in  favor  of  exchange 
weights.  For  if  these  articles,  which  are  used  largely  by  the 
original  producers  in  making  things  quite  different  from  com  and 
hay  (for  instance,  pork  and  beef),  are  counted  at  the  full  amount 
produced  or  consumed,  and  if  their  products  (the  pork  and  beef) 
are  also  counted  at  the  full  amount  produced  or  consumed,  there 
will  be  a  great  deal  of  double  counting.  Not  all  but  much  of  this 
duphcation  can  be  eliminated  by  counting  only  the  amount  of 
com  and  hay  sold  by  the  producers  and  letting  the  rest  of  these 
articles  produced  and  consumed  get  their  proper  representation 
under  the  captions  of  pork,  beef,  etc. 

If  for  this  reason  exchange  appears  a  rather  better  criterion  of 
importance  than  production,  consumption,  or  a  combination  of 
the  two,  it  remains  only  to  decide  whether  the  number  of  times  a 
thing  is  exchanged  should  be  recognized.  Professor  Irving  Fisher 
had  good  cause  to  propose  multiple  counting,  for  he  wanted  an  in- 
dex number  of  prices  for  constmcting  the  "  equation  of  exchange,'' 
a  mathematical  expression  of  the  necessary  equivalence  between 
the  total  volume  of  business  done  in  a  country  and  the  total  vol- 
ume of  payments  effected  by  means  of  money  and  credit  instm- 
ments.  Of  course  the  oftener  an  article  is  sold  and  paid  for  the 
more  important  it  is  as  a  factor  in  this  equation.  But  it  does 
not  follow  that  the  economic  importance  of  an  article  is  greatly 
changed  by  reorganizing  the  chain  of  business  enterprises  that 
deal  in  it.  "  Integration  of  industry,"  as  expressed  in  our  tmsts, 
does  not  make  pig  iron  less  significant  as  an  item  in  the  country's 


94  BUSINESS  STATISTICS 

economic  life,  except  in  the  sense  that  it  reduces  the  average 
number  of  transfers  of  ownership.  The  quantity  of  the  article 
that  enters  into  exchange,  then,  irrespective  of  the  number  of 
turnovers,  is  probably  the  most  satisfactory  gauge  of  importance 
to  apply  in  making  general-purpose  index  numbers.  But  any- 
one experienced  in  the  search  for  statistical  information  will  need 
no  warning  that  in  the  working  out  of  weights  along  this  line 
many  puzzling  cases  will  arise  in  which  consistency  will  be  diffi- 
cult to  maintain,  to  say  nothing  of  wide  gaps  and  many  weak 
places  in  the  existing  data  being  revealed. 

Critical  Valuation 

A  just  evaluation  of  our  seven  American  index  numbers  is  not 
easy  to  make.  For  a  comparison  has  Uttle  meaning  unless  it 
deals  with  all  the  important  points  at  which  the  series  differ. 
And  since  no  one  series  is  superior  to  the  others  at  all  points  a 
verdict  cannot  be  rendered  in  a  single  sentence. 

In  the  publication  of  actual  prices,  the  Bureau  of  Labor  Statis- 
tics and  Bradstreet's  stand  foremost.  The  contribution  they  have 
thus  made  to  the  knowledge  of  prices  possesses  great  and  perma- 
nent value  over  and  above  the  value  attaching  to  their  index 
numbers.  For,  it  is  well  to  repeat,  all  efforts  to  improve  index 
numbers,  all  investigations  into  the  causes  and  consequences  of 
price  fluctuations,  and  all  possibility  of  making  our  pecuniary 
institutions  better  instruments  of  public  welfare  depend  for  their 
realization  in  large  measure  upon  the  possession  of  systematic 
and  long-sustained  records  of  actual  prices.  And  much  of  this 
invaluable  material  would  be  lost  if  it  were  not  recorded  month  by 
month  and  year  by  year. 

Critical  users  of  statistics  justly  feel  greater  confidence  in 
figures  which  they  can  test  than  in  figures  which  they  must  accept 
upon  faith.  Hence  the  compilers  of  index  numbers  who  do  not 
pubKsh  their  original  quotations  inevitably  compromise  some- 
what the  reputation  of  their  series.  They  compromise  this 
reputation  still  further  when  they  fail  to  explain  in  full  just  what 
commodities  they  include,  and  just  what  methods  of  compilation 
they  adopt.^    In  the  latter  respect  the  Annalist  index  number 

^  Compare  p.  57. 


STATISTICAL  METHODS  95 

shares  first  honors  with  the  Bureau  of  Labor  Statistics'  series. 
Anyone  who  chooses  to  take  the  trouble  can  find  what  commod- 
ities are  used,  and  how  the  final  results  are  worked  up  from  the 
raw  material.  Bradstreet's  index  number  suffers  a  bit  in  com- 
parison because  readers  are  not  told  which  96  commodities  out  of 
the  106  of  which  prices  are  published  are  included  in  the  index 
number,  and  because  the  method  of  reducing  prices  by  the  yard, 
the  dozen,  the  bushel,  the  gallon,  etc.,  to  prices  per  pound  is  not 
fully  explained.  Dun's  index  number  is  more  mysterious  still, 
because  neither  the  list  of  commodities  nor  the  weights  applied 
to  each  commodity  are  disclosed.  And  Gibson's  present  series 
also  stands  partly  in  the  shadow  because,  while  the  list  of  com- 
modities is  known,  the  publishers  state  merely  that  these  articles 
are  weighted  by  Dun's  system. 

With  reference  to  weighting,  Bradstreet's  index  number  takes 
low  rank,  for  the  plan  of  reducing  all  quotations  to  prices  per 
pound  grossly  misrepresents  the  relative  importance  of  many 
articles.  That  figures  made  thus  should  give  results  in  close 
agreement  with  the  Bureau  of  Labor  Statistics'  series  is  a  remark- 
able demonstration  of  the  ability  of  index  numbers  to  extract 
substantial  truth  even  from  unpromising  materials.  The  agree- 
ment is  all  the  more  remarkable  since  the  bureau's  series  is  also 
badly  weighted,  though  in  a  different  way  and  in  less  degree. 
The  revised  bureau  series  is  scarcely  better  than  the  original  in 
this  respect.  It  is  better  in  substituting  a  single  set  of  relatives  for 
the  articles  of  minor  importance  to  which  the  original  accorded 
several  sets  (for  example,  shirtings,  sheetings,  tools,  window 
glass,  etc.),  but  worse  in  cutting  down  the  representation  accorded 
to  great  staples  (for  example,  pork,  coal,  pig  iron,  and  leather). 
The  Annalist  index  number  follows  the  sensible,  though  rudi- 
mentary, plan  of  including  two  or  three  varieties  of  the  most 
important  articles,  and  only  one  of  the  less  important.  The  like 
can  be  said  in  favor  of  Gibson's  index  number,  both  in  its  original 
and  its  present  form,  and  in  addition  Gibson  uses  the  Dun 
system  of  weights.  The  latter  system  is,  in  theory,  the  nearest 
approach  to  a  satisfactory  plan  of  weighting  made  by  any  Ameri- 
can index  number  at  present.    Whether  the  practice  is  as  good  as 


96  BUSINESS  STATISTICS 

the  theory  is  doubtful,  to  say  the  least,  for  anyone  familiar  with 
the  deficiencies  of  American  statistics  of  consumption  must 
wonder  whence  the  compilers  derived  their  estimates  of  the 
quantities  of  310  commodities  "  annually  consumed  by  each 
inhabitant."  Moreover,  what  little  is  known  concerning  the 
actual  weights  is  not  unobjectionable.  Fifty  per  cent  of  the 
total  is  too  large  a  weight  to  allow  to  foods  in  a  wholesale-price 
series.  Even  in  the  great  collection  of  budgets  of  workingmen's 
families  made  by  the  Commissioner  of  Labor  in  1901  the  aver- 
age expenditure  for  food  was  less  than  45  per  cent  of  total  family 
expenditure  ;i  and  in  wholesale  markets,  of  course,  many  com- 
modities that  are  never  directly  consumed  by  families  have  great 
importance. 

Dun's  index  number  is  supposed  to  stand  first  in  number  of 
commodities  included,  but  lack  of  definite  information  makes  it 
impossible  to  judge  whether  its  list  is  well  balanced.  The  bureau's 
list  also  is  long  and  contains  samples  of  many  different  kinds  of 
goods,  manufactured  as  well  as  raw,  consumed  for  all  sorts  of 
purposes  and  produced  under  all  sorts  of  conditions;  but  the 
representation  accorded  to  different  parts  of  the  whole  system  of 
prices  is  certainly  far  from  equitable.  Bradstreet's  list,  while  less 
than  half  as  long  as  the  bureau's,  seems  better  chosen.  It  is 
particularly  strong  in  raw  materials  and  rather  weak  in  manu- 
factured goods.  The  same  remarks  apply  to  Gibson's  original 
list,  though  it  suffers  in  comparison  by  being  about  half  the  length 
of  Bradstreet's.  Finally,  the  present  Gibson  index  number  and 
the  Annalist  series  are  confined  to  foodstuffs,  and  make  no 
pretense  of  representing  prices  at  large. 

In  the  form  of  presenting  results,  Bradstreet's  set  an  admirable 
example,  which  was  wisely  followed  by  Dun's.  Their  sums  of 
actual  prices  can  readily  be  turned  into  relatives  on  any  base 
desired,  and  hence  can  be  made  to  yield  direct  comparisons  be- 
tween any  two  dates.  The  other  series,  as  averages  of  relative 
prices  on  the  1 890-1 899  basis,  cannot  be  properly  shifted  without 
a  detailed  recomputation  of  the  relative  prices  of  each  commodity, 

^  Eighteenth  Annual  Report  of  the  Commissioner  of  Labor,  1903,  p.  66.  The  data 
represented  25,400  families  and  124,108  persons,  both  natives  and  immigrants. 


STATISTICAL  METHODS 


97 


and  force  readers  to  make  all  their  comparisons  in  terms  of  what 
prices  were  in  the  decade  used  as  base. 

It  is  interesting,  finally,  to  test  the  reliability  of  the  several 
index  numbers  as  "  business  barometers."  Monthly  figures 
would  be  much  better  than  our  yearly  averages  for  this  purpose; 
but,  since  they  are  not  to  be  had  for  most  of  the  series  during 
most  of  the  period  covered,  we  must  do  the  best  we  can  with  the 
rougher  gauge.  In  ii  of  the  23  cases  of  changes  from  one  year  to 
the  next  the  seven  index  numbers  disagree  as  to  whether  prices 
rose,  fell,  or  remained  constant.  In  the  following  schedule  these 
II  years  are  represented  by  columns  in  which  each  index  number 
is  credited  with  plus  one  when  its  change  accords  with  the  char- 
acter of  the  alteration  in  business  conditions,  debited  with  minus 
one  in  cases  of  disagreement,  and  marked  zero  when  it  recognizes 
no  change  in  the  price  level.^  The  net  scores  made  by  casting  up 
the  plus  and  minus  entries  indicate  roughly  the  relative  faithful- 
ness with  which  these  series  have  reflected  changes  in  business 
conditions  in  the  past.  Of  the  index  numbers  regularly  pub- 
lished, Bradstreet's  makes  much  the  best  showing.  Even  the 
scores  against  it  in  1895  and  1903,  and  its  failure  to  show  the 
reaction  in  business  conditions  in  1913,  would  be  wiped  out  were 
the  data  by  quarters  and  months  used  in  place  of  the  annual 
averages. 


Index  number 


[891 


1893 


189s 


1897 


1901 


1903 


1904 


190S 


r9o8 


1910 


1913 


Net 
score 


1.  Bradstreet's 

2.  Bureau    of    Labor 

Statistics,  revised 

3.  Gibson,  original. . . . 

4.  Bureau    of    Labor 

Statistics,  original 

5.  Annalist 

6.  Dun's 

7.  Gibson,  present. . . . 


+  1 


+  1 


+  1 

—  I 

—  I 

—  I 


—  I 

—  I 

—  I 


—  I 

—  I 

—  I 

—  I 


+  1 
+  1 


+  1 
—  I 
+  1 


+  1 

+  1 
+  1 

+  1 

—  I 

—  I 

—  I 


+  1 

—  I 
+  1 
+  1 
+  1 


+  1 


—  I 

+  1 

—  I 

—  I 
+  1 


+  1 

+  1 
+  1 

+  1 
+  1 


+  1 

+  1 
+  1 

+  1 

—  I 

+  1 

—  I 


+  1 

+  1 
+  1 

+  1 
+  1 
+  1 


+  1 


+  1 
+  1 
+  1 


4-6 

+6 
+5 

+4 

—  I 

—  2 

—  2 


*  Based  on  Bradstreet's  original  figxires  for  1890  and  1891,  figiires  which  are  not  used  in  the  index 
number  as  currently  published. 

*  For  a  description  of  American  business  conditions  in  this  period,  see  W.  C. 
Mitchell,  Business  Cycles,  Chapter  III  (Summary,  p.  88). 


CHAPTER  II 

STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS 
I.   Statistical  Indices  of  Business  Conditions  ^ 

By  Melvin  T.  Copeland 

It  is  the  purpose  of  this  article  to  discuss  the  use  of  statistics  for 
indicating  the  trend  of  business  conditions.  The  first  task  is  to 
ascertain  what  available  statistics  are  symptomatic  of  business 
changes;  the  second  to  examine  critically  some  of  the  methods 
by  which  statistics  are  being  used  at  the  present  time  for  business 
forecasting;  and  the  third  to  suggest  an  improved  method.  The 
subject  is  large  and  the  work  is  still  in  an  experimental  stage; 
hence  all  conclusions  must  be  considered  tentative. 

This  subject  obviously  is  not  merely  academic,  but  of  large 
practical  interest.  Bankers,  financiers,  and  the  heads  of  manu- 
facturing and  mercantile  enterprises  must  constantly  study 
present  conditions  and  future  prospects.  Many  manufacturers, 
for  example,  buy  raw  materials  and  start  manufacturing  opera- 
tions months  before  the  finished  goods  are  placed  upon  the  mar- 
ket. Plans  must  be  made  and  production  regulated  according  to 
the  conditions  which  such  producers  expect  to  encounter  at  a  later 
time.  If  they  err  in  judgment,  they  are  placed  at  a  disadvantage 
which  may  prove  serious.  The  maladjustment  which  occurs  dur- 
ing a  period  of  crisis  may  be  disastrous.  If  manufacturers  and 
merchants  can  be  forewarned,  fewer  will  be  caught  unawares  and 
the  severity  of  the  shocks  will  be  alleviated. 

It  is  now  generally  agreed  by  students  of  the  subject  that  the 
ups  and  downs  of  business  prosperity  are  due  to  deep-seated  in- 
fluences, and  business  men  are  more  and  more  giving  up  the  long 
persisting  notion  that  changes  in  business  conditions  are  caused 
primarily  by  tariff  acts,  political  happenings,  or  court  decisions. 

1  Quarterly  Journal  of  Economics,  vol.  29,  pp.  522-562.  Reprinted  by  permission 
of  the  Quarterly  Journal  oj  Economics. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS        99 

More  attention  is  being  given  to  the  symptomatic  statistics  cur- 
rently published  in  the  financial  journals,  trade  publications,  and 
daily  papers.  Some  executives  have  statistical  reports  carefully 
prepared  for  their  own  businesses  in  order  to  make  comparisons 
with  previous  periods  and  with  the  external  statistics  for  other 
industries  and  trades. 

The  published  statistics,  although  inadequate  for  a  complete 
analysis,  furnish  ample  material  for  experimentation.  Each  set 
of  statistics,  however,  requires  careful  examination;  some  are 
worthless.  Moreover,  of  those  statistics  which  appear  to  be  reli- 
able barometers  of  business  changes,  only  those  which  are  avail- 
able daily,  weekly,  or  monthly  can  ordinarily  be  used.  A  business 
man  wishes  current  information ;  for  him  statistics  which  are  a 
year  old  are  more  or  less  antiquated.  And  in  studying  long  time 
fluctuations  and  the  large  trade  cycles,  annual  figures  are  unsatis- 
factory because  of  the  impossibility  of  determining  to  what  extent 
the  figures  represent  the  antecedents  and  to  what  extent  they 
represent  the  effects  of  important  events  happening  within  the 
calendar  or  fiscal  year.  The  annual  statistics  for  the  years  1873, 
1893,  and  1907,  for  instance,  are  not  properly  comparable  in  a 
study  of  crises,  since  the  panic  of  1873  began  in  the  middle  of 
September,  that  of  1893  in  May,  and  that  of  1907  in  October.  In 
the  annual  figures  for  these  years  the  antecedents  and  the  effects 
of  the  panics  are  thrown  together  in  unequal  proportions.  In 
most  instances  a  monthly  basis  of  comparison  seems  to  give  the 
best  results.  With  these  considerations  in  mind  we  can  proceed 
to  an  examination  of  the  statistics. 

Available  Statistics 

(i)  Imports  of  Merchandise.  The  statistics  for  the  value  of 
merchandise  imported  into  the  United  States  correlate  with  busi- 
ness conditions.^  During  periods  of  prosperity  more  raw  mate- 
rials are  bought  for  our  manufacturing  plants  and  the  imports 
of  finished  goods  for  immediate  consumption  are  also  larger. 
During  periods  of  depression,  on  the  other  hand,  our  purchases 

^  Import  and  export  statistics  are  published  in  the  Monthly  Summary  of  Com- 
merce and  Finance  and  in  various  financial  journals. 


lOO 


BUSINESS  STATISTICS 


in  foreign  markets  fall  off.  Although  the  import  statistics  are 
affected  by  general  changes  in  price  level,  short  time  comparisons 
can  safely  be  made.  Their  most  serious  defect  is  in  their  sus- 
ceptibility to  the  influence  of  tariff  changes;  but  this  does  not 
destroy  their  worth  as  an  index  to  general  conditions. 

In  order  to  show  the  course  of  imports  during  a  portion  of  a 
typical  business  cycle,  the  monthly  statistics  for  the  years  1903- 
08  have  been  plotted  on  Chart  I.    Final  conclusions  cannot,  of 


course,  be  drawn  from  statistics  for  so  short  a  period,  but  for  ex- 
perimental purposes  these  years  seem  to  be  representative. 
The  general  upward  trend  of  the  curve  during  the  years  of  pros- 
perity immediately  preceding  the  crisis  of  1907  is  noteworthy. 
The  effects  of  the  crisis  are  shown  in  the  ensuing  decline.  It  is 
to  be  noted,  also,  that  these  statistics  show  a  seasonal  fluctuation, 
with  a  peak  in  March,  due  presumably  to  the  importing  of  mer- 
chandise for  the  spring  trade,  a  sag  in  the  summer,  and  another 
upward  movement  in  the  autumn  caused  by  imports  of  merchan- 
dise for  the  holiday  trade. 

(2)  Exports  of  Merchandise.    For  judging  business  conditions, 
the  export  statistics  of  the  United  States  are  much  less  useful 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      lOI 

than  the  import  statistics.^  The  export  statistics  are,  in  them- 
selves, less  reliable  because  of  the  greater  percentage  of  error  in 
the  returns;  they  are  not  scrutinized  by  the  customs  inspectors 
and  there  is  no  adequate  check  upon  the  accuracy  of  the  export- 
ers' manifests.  Furthermore,  because  of  the  predominance  of 
raw  materials  and  foodstuffs  in  our  export  trade,  the  volume  of 
our  exports  depends  largely  upon  conditions  affecting  demand 
from  foreign  countries.  The  movement  does  not  necessarily  in- 
dicate the  strength  or  weakness  of  the  domestic  situation.  The 
exports  of  manufactured  goods  tend  to  fall  off  with  improvement 
in  domestic  demand  and  to  increase  during  depression,  when  our 
manufacturers  show  their  greatest  interest  in  developing  foreign 
trade.  The  course  of  the  export  trade,  1903-08,  is  also  shown  on 
Chart  I.  The  marked  seasonal  fluctuation  is  due  to  the  heavy  ex- 
portation of  raw  cotton  and  other  agricultural  products  during 
the  late  autumn  and  winter  months. 

Balance  of  trade  statistics,  which  show  the  difference  between 
imports  and  exports,  seem  to  me  to  have  little  significance.  There 
are  so  many  invisible  exports  and  imports  that  the  balance  of 
trade  figures  always  involve  a  large  element  of  uncertainty.  How 
great  is  the  foreign  indebtedness  upon  which  interest  payments 
are  due  ?  Is  the  investment  of  foreign  capital  increasing  or  is  the 
foreign  indebtedness  being  paid  off  ?  What  shipments  of  securi- 
ties are  being  made  ?  What  transportation  charges  are  to  be 
paid  ?  No  record  can  be  kept  of  all  these  transactions,  which 
have  just  as  much  influence  as  the  visible  merchandise  shipments 
upon  foreign  exchange  rates  and  the  movement  of  specie. 

(3)  Immigration.  The  statistics  for  immigration  fluctuate  in 
a  general  way  with  business  conditions  in  the  United  States.  An 
upward  tendency  was  indicated,  for  example,  during  1905,  1906, 
and  1907,  and  a  marked  reaction  in  1908.  The  immigration  fig- 
ures are  of  especial  interest  to  certain  manufacturers,  since  they 
give  some  indication  of  the  increase  in  the  supply  of  unskilled 
labor.    Their  significance  as  a  general  index,  however,  is  lessened 

^  The  export  statistics  for  Great  Britain,  on  the  contrary,  are  a  particularly  good 
index  of  conditions  in  that  country,  since  the  British  manufacturers  are  so  largely 
dependent  upon  foreign  markets. 


I02  BUSINESS  STATISTICS 

by  the  fact  that  the  movement  of  immigrants  adjusts  itself  only 
with  more  or  less  delay,  according  to  information  transmitted 
from  this  country  to  the  foreigners  before  they  leave  their  homes. 
The  net  immigration,  that  is  the  total  number  of  immigrants  less 
the  number  of  emigrants,  should  be  more  significant;  but  the 
latter  figures  have  been  pubhshed  only  since  July,  1907.  A  much 
more  serious  criticism  of  the  use  of  immigration  statistics  as  a 
business  barometer  is  that  they  are  influenced  not  only  by  con- 
ditions in  the  United  States  but  by  industrial,  social,  and  political 
conditions  in  the  countries  whence  the  immigrants  come.  At  best 
these  statistics  could  not  show  a  very  close  approximation  to 
actual  changes  in  business  conditions  in  this  country.  At  the 
present  time,  in  consequence  of  the  European  war,  all  comparisons 
have  become  inconclusive. ^ 

(4)  Bank  Clearings.  Because  of  the  wide-spread  custom  of 
making  payments  by  check,  bank  clearings  give  a  fairly  accurate 
index  to  the  volume  of  business  transactions.  Although  influ- 
enced by  general  changes  in  prices,  by  bank  consolidations,  and 
by  the  spread  of  the  check-using  habit,  bank  clearings  show 
approximately  how  much  business  is  being  done  at  any  one  time. 
As  a  business  index,  the  bank  clearings  for  the  United  States 
exclusive  of  New  York  City  are  more  significant  than  the  total 
clearings.  The  New  York  clearings,  which  constitute  about  one- 
half  of  the  total  clearings  for  the  country,  are  so  affected  by  the 
volume  of  speculative  transactions  upon  the  Stock  Exchange  that 
they  should  at  least  be  considered  separately.  The  clearings  in 
other  cities  where  stock  exchanges  are  located  are  not  a  sufficiently 
large  proportion  of  the  total  to  necessitate  their  exclusion.  Bank 
clearings  are  not  subject  to  wide  fluctuations  and  do  not  indicate 
what  is  likely  to  take  place  in  the  future,  but  they  do  show  in  a 
general  way  what  is  taking  place.  The  clearings  statistics  as  re- 
ported by  Bradstreefs,  the  Commercial  and  Financial  Chronicle, 
and  Dun^s  Review  differ  slightly  in  detail  but  approximately  agree. 

(5)  Railroad  Gross  Earnings.  Railroad  traffic  fluctuates  with 
the  amount  of  business  being  done  in  the  community.    As  an  in- 

1  Immigration  statistics  are  currently  published  in  numerous  periodicals  and  also 
in  the  Monthly  Summary  of  Commerce  and  Finance. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      I03 

dex  to  the  volume  of  traffic,  since  tonnage  figures  are  not  currently 
available/  railroad  gross  earnings  are  commonly  used.  Statistics 
for  net  earnings  show  the  general  financial  condition  of  the  roads, 
but  are  far  less  useful  for  general  purposes  than  the  gross  earnings. 
The  latter  are  in  the  same  class  as  bank  clearings,  showing  what  is 
taking  place  but  foretelling  little  of  the  future. 

Because  of  the  delay  which  occurs  in  securing  reports  from  some 
of  the  companies,  the  total  earnings  for  all  the  roads  in  the  coun- 
try cannot  advantageously  be  used  in  studying  business  indices. 
It  is  necessary,  therefore,  to  take  the  earnings  for  a  representative 
group  of  roads.  In  the  Commercial  and  Financial  Chronicle  sta- 
tistics for  the  earnings  of  a  group  of  roads  are  given  monthly. 
These  statistics  are  usually  made  up  from  preliminary  returns  and 
are  thus,  to  some  degree,  subject  to  revision.  The  most  serious 
difficulty,  however,  which  prevents  the  use,  except  for  casual  ob- 
servations, of  such  compilations  as  those  of  the  Commercial  and 
Financial  Chronicle,  is  that  the  make-up  of  the  group  continually 
changes.  The  nmnber  of  roads  included  varies  from  month  to 
month,  yielding  totals  which  usually  can  be  compared  only  with 
the  preceding  month  or  with  the  corresponding  month  of  the 
preceding  year.  Mr.  Babson  presents  on  his  desk  sheet  a  useful 
monthly  table  of  the  total  gross  earnings  of  ten  railroads,  always 
including  figures  for  the  same  roads. 

(6)  Idle  Cars.  From  January,  1908,  to  November,  1914,  the 
American  Railway  Association  issued  semi-monthly  reports  on 
the  number  of  idle  freight  cars.  Since  February  i,  191 5,  monthly 
reports  have  been  issued.  Although  these  reports  have  probably 
been  of  assistance  to  railroad  officials  by  furnishing  a  guide  to 
traffic  demands  and  by  enabling  them  to  secure  a  better  balance 
of  car  supply,  I  am  disposed  to  think  that  the  statistics  are  much 
less  reliable  as  a  business  index  than  has  been  commonly  believed. 

In  the  first  place,  the  number  of  roads  reporting  has  varied. 
On  April  i,  19 14,  the  number  of  roads  reporting  was  190;  on  June 
I,  176;  on  October  i,  204;  and  on  November  i,  192.    Similar 

*  For  a  few  years  the  American  Railway  Association  has  published  a  monthly 
bulletin,  Statement  of  Freight  Car  Balance  and  Performance,  which  gives,  amongst 
other  things,  the  ton-miles  of  freight  carried,  but  these  bulletins  appear  several 
months  late. 


I04 


BUSINESS  STATISTICS 


variations  appear  for  other  months.  Further,  in  making  any  long 
time  comparisons,  the  change  in  the  capacity  of  the  cars  is  also  to 
be  considered.  But  neither  of  these  factors  is  so  fundamental  as 
the  irregularity  in  the  number  of  new  cars  added  from  year  to 
year.  The  statistics  for  the  number  of  freight  cars  idle  cannot 
show  the  fluctuation  in  the  volume  of  traffic  and,  hence,  the 
amount  of  business  done,  when  the  number  of  cars  available  for 
service  itself  fluctuates  irregularly.  The  number  of  idle  cars  de- 
pends not  only  upon  the  number  actually  in  use,  but  also  upon 
the  number  of  new  cars  added  and  of  old  cars  scrapped.  The 
variations  in  the  number  of  cars  in  service  are  shown  by  the  fol- 
lowing table,  compiled  from  the  bulletins  of  the  American  Rail- 
way Association.  The  wide  divergencies  in  the  number  of  new 
cars  added  during  these  years  vitally  affect  the  number  of  cars 
idle  at  any  one  time;  hence,  without  a  statement  each  month  of 

Revenue  Freight  Cars 


Cars  Owned 

at  End  of 

Year 

Increase  or 
Decrease  Dur- 
ing Year 

Average 
Number  Idle 
Per  Month 

Largest 

Number 

Idle 

Smallest 

Number 

Idle 

1908 

2,077,764 

+     78,843 

273,600 

408,900 

104,800 

1909 

2,049,015 

-     28,749 

187,800 

321,800 

-  4,3001 

I9I0 

2,162,444 

+  113,429 

59,300 

138,100 

10,900 

I9II 

2,197,399 

+    34,955 

124,100 

198,500 

24,800 

1912 

2,207,516 

4-    10,117 

34,100 

113,100 

-50,6001 

I9I3 

2,297,818 

+    90,302 

42,200 

79,400 

2,200 

1  Shortage. 

additions  or  withdrawals,  idle  car  statistics  should  be  used  with 
extreme  caution.  The  statistics  as  commonly  published  give  us 
little  clue  as  to  the  degree  of  change  which  has  taken  place. 

(7)  New  Building.  Numerous  cities  now  have  building  regu- 
lations and  require  that  a  permit  be  obtained  from  a  building  com- 
missioner before  construction  may  be  commenced.  A  record  of 
these  permits  is  kept,  furnishing  an  index  to  building  activity. 
The  figures,  to  be  sure,  indicate  only  the  plans  at  the  time  that 
the  permit  is  issued  and  do  not  show  over  how  long  a  period  the 
building  operations  will  extend  or  what  cessations  of  construction 
occur.  Nevertheless  they  should  serve  roughly  as  a  general  index. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS       105 

The  financial  papers  regularly  publish  compilations  of  statistics 
for  new  building,  but  not  in  a  form  for  continuous  conoiparisons. 
Bradstreet's,  for  example,  has  a  monthly  table  of  new  building 
statistics,  but  the  niunber  of  cities  included  varies  from  month  to 
month,  and  occasionally  the  figures  for  some  of  the  large  cities 
are  omitted,  thus  introducing  a  relatively  large  percentage  of 
error.  For  this  subject  Mr.  Babson  also  has  a  serviceable  table 
on  his  desk  sheet,  which  gives  the  value  of  the  new  building  per- 
mits issued  in  twenty  selected  cities. 

(8)  Commodity  Prices'  Prices  of  commodities  tend  to  rise  dur- 
ing periods  of  prosperity  and  to  fall  during  periods  of  depression. 
The  most  accessible  general  index  for  monthly  changes  in  com- 
modity prices  is  that  published  by  Bradstreefs.  The  index  number 
is  in  the  form  of  the  "  total  of  the  prices  per  pound  of  ninety-six 
articles,"  including  breadstuffs,  livestock,  provisions,  fruits,  hides 
and  leather,  textiles,  coal  and  coke,  metals,  oils,  naval  stores, 
building  materials,  chemicals  and  drugs,  and  miscellaneous.  This 
method  of  computation  permits  such  articles  as  silk  cloth,  which 
is  light  in  weight  and  high  in  price,  to  exercise  more  influence 
on  the  totals  than  is  exercised  by  the  bulky  staple  commodities. 
And,  so  far  as  I  know,  no  explanation  has  ever  been  given  of  the 
methods  of  finding  the  price  per  pound  of  eggs  or  per  pound  of 
oil.  Ninety-six  pounds  of  such  an  incongruous  mixture  is  hard 
to  imagine. 

(9)  Business  Failures.  The  frequency  of  business  failures 
tends  to  vary  inversely  with  general  business  conditions.  During 
periods  of  prosperity  bankruptcies  diminish.  But  as  soon  as 
depression  sets  in,  the  weaker  firms,  which  have  been  able  to  hold 
on  because  of  strong  business  conditions,  fail  in  greater  numbers. 
The  statistics  for  business  failures  are  a  particularly  sensitive  in- 
dex and  show  to  what  extent  liquidation  has  progressed.  They 
aid  in  forming  a  judgment  as  to  when  business  recovery  is  to  be 
anticipated. 

Statistics  for  the  number  and  liabilities  of  business  failures  are 
published  by  both  Dun's  Review  and  Bradstreei's.  The  figures 
from  these  two  sources  differ  somewhat  in  detail  but  show  the 
same  general  tendencies.    The  statistics  for  the  total  liabilities  of 


Io6  BUSINESS  STATISTICS 

failures  are  more  commonly  used  than  the  statistics  for  the  num- 
ber of  failures.  The  liability  figures,  however,  occasionally  show 
a  sharp  increase  in  consequence  of  a  single  heavy  failure  which, 
from  the  general  point  of  view,  does  not  deserve  the  weight  thus 
given  it.  Such  experiments  as  I  have  made  indicate  that  the 
statistics  of  failures  by  number  correlate  more  closely  with  other 
business  indices.^  The  statistics  of  business  failures,  like  so  many 
others,  show  a  marked  seasonal  fluctuation,  reaching  their  high 
point  during  the  inventory  months  of  December  and  January 
each  year. 

(lo)  Stock  Market.  Security  quotations  on  the  Stock  Market 
fluctuate  sensitively  with  every  change  and  with  every  rumor  of 
change  in  business  conditions.  The  prices  of  securities  rise  during 
periods  of  prosperity  owing  to  general  optimism  and  high  divi- 
dends. But  when  money  rates  begin  to  tighten,  the  stock  market 
is  one  of  the  first  indices  to  give  warning  of  the  coming  crisis. 
Beginning  in  January,  1907,  for  instance,  there  was  an  almost 
constant  decline  until  after  the  panic,  as  is  shown  upon  Chart  II. 
The  curve  indicates  the  changes  in  the  average  price  of  twenty- 
five  stocks  on  the  New  York  Stock  Exchange. 

Several  stock  market  barometers,  or  indices  of  security  prices, 
are  published.  I  have  used  that  of  the  Boston  Transcript.  Until 
the  closing  of  the  Stock  Exchange  in  July,  1914,  this  barometer 
gave  daily  the  changes  in  the  average  price  of  twenty-five  stocks, 
including  eighteen  railroads,  one  public  service  company,  and  six 
industrials.  These  were,  on  the  whole,  well-selected  and  repre- 
sentative. The  stock  market  index  of  the  Wall  Street  Journal  has 
been  more  commonly  used  for  showing  movements  of  security 
prices;  but  amongst  the  twelve  industrials  which  it  formerly 
included  there  was  one  quotation  for  United  States  Steel  pre- 
ferred, one  for  United  States  Steel  common,  one  for  United 
States  Rubber  preferred,  and  one  for  United  States  Rubber  com- 
mon. The  weight  thus  given  to  steel  and  especially  to  rubber 
seems  to  have  been  unwarranted.     Recently  a  quotation  for 

^  My  tentative  conclusion  that  the  number  of  failures  is  the  better  index  is  sup- 
ported also  by  Mr.  D.  R.  Little,  editor  of  Dun's  Review,  who  states:  "  The  number 
of  failures  reflects  conditions  more  accurately  than  do  the  aggregate  liabilities." 
Moody's  Magazine,  February,  191 5,  p.  79. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      lOJ 


General  Motors  has  been  substituted  for  United  States  Rubber 
preferred. 

The  average  monthly  figures  which  are  plotted  on  the  chart 
were  obtained  by  taking  an  average  of  the  Saturday  quotations 
for  each  month.    This  average  of  the  Saturday  quotations  varies 


CbjlbtII 


1904, 


A^1:iucE  Price  or  25  Stocks' 


little  from  an  average  of  all  the  days  in  the  month  and  is  fully 
representative. 

The  volume  of  transactions  upon  the  New  York  Stock  Ex- 
change is  also  of  some  value  as  a  business  index.  Purely  specu- 
lative influences  or  manipulation,  however,  may  cause  a  rise  or 
decline  in  the  activity  of  the  stock  market,  which  does  not  corre- 
late with  actual  changes  in  business  prospects. 

(i  i)  Money  Rates.  The  average  rate  on  60-90  day  commercial 
paper  serves  as  an  index  to  money  rates.  The  curve  for  money 
rates  on  Chart  III  has  been  plotted  from  the  monthly  averages 
given  by  Professor  Mitchell  in  his  Business  Cycles}  This  curve 
correlates  closely  with  changes  in  business  conditions,  sagging  at 
times  of  depression,  rising  gradually  with  increasing  prosperity, 

1  Current  figures  for  money  rates  are  conveniently  published  in  the  Commercial 
and  Financial  Chronicle. 


io8 


BUSINESS  STATISTICS 


and  then  moving  sharply  upward  during  a  crisis.    It  is  one  of  our 
most  useful  indices. 

(12)  Bank  Loans.  Banking  statistics  in  general  have  been  so 
affected  by  the  introduction  of  the  new  Federal  Reserve  system 
that  few  comparisons  can  safely  be  made  with  the  past.  Banking 
indices  in  the  future  can  probably  be  worked  out  only  after  a  new 


Rate' ON  CbmiEitcui.  Paves 

lOAKS— New  Yobx  Clb&oino  Bouse  GMUOca 


set  of  statistics  has  been  accumulated.  For  purposes  of  illustra- 
tion, however,  the  average  loans  of  the  New  York  Clearing  House 
banks  may  be  taken.  The  course  of  these  loans,  as  indicated  by 
monthly  averages  of  the  weekly  figures  given  in  the  Commercial 
and  Financial  Chronicle,  is  shown  for  the  years  1903-08  on  Chart 
III.  It  will  be  seen  that  the  change  from  month  to  month  is 
slight.  In  fact  the  relative  stability  of  these  figures  during  the 
period  of  rising  money  rates  in  1906-07  gives  them  a  peculiar 
significance,  since  it  shows  that  the  New  York  banks  were  regu- 
lating their  loans  with  a  view  of  just  barely  maintaining  the 
required  25  per  cent  reserve  against  deposits.^  When  money 
rates  were  low,  during  depression,  more  funds  were  deposited  in 

1  O.  M.  W.   Sprague,  History  of  Crises  under  the  National  Banking  System, 
p.  222. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      IO9 

New  York  by  the  country  banks  and  loans  expanded.  The  bank- 
ing system  was  exceedingly  ill-adjusted  for  meeting  an  emergency. 
(13)  Pig  Iron.  The  classical  business  barometer  is  the  iron 
industry.  This  industry  is  sensitive  to  changes  in  business  con- 
ditions because  of  the  fact  that  iron  is  used  so  largely  for  the  con- 
struction of  new  machinery,  new  railway  equipment,  and  recently 


,  Pio  Iron  —  Pkoduction 
Pio  Iron  — Prics 


for  new  building.  The  demand  for  iron  falls  ojff  immediately  when 
business  depression  begins,  since  additions  and  renewals  cease. 
Construction  work  being  postponable,  the  iron  industry  is  one  of 
the  first  to  feel  the  effects  of  forced  economy. 

As  is  shown  on  Chart  IV,  the  price  and  production  of  pig  iron 
tend  to  move  together.  During  periods  of  prosperity  both  pro- 
duction and  price  tend  to  rise,  whereas  after  a  crisis  both  fall. 
This  same  tendency  is  manifested  by  numerous  other  commod- 
ities. At  times,  however,  price  and  production  move  in  opposite 
directions,  as  for  example,  when  a  considerable  addition  to  the 
producing  capacity  has  been  made.  For  this  reason  it  seems 
that  both  the  price  and  production  figures  should  be  taken  into 
account.  So  far  as  the  years  1903-08  are  concerned,  attention 
is  to  be  called  to  the  rapid  rise  in  price  in  the  latter  part  of  1906 


1 1 0  BUSINESS  ST  A  TISTICS 

and  to  the  decline  which  began  in  April,  1907.  The  price  of 
pig  iron  broke  in  April  although  the  panic  did  not  occur  until 
October.  The  production  kept  up  until  November.  The  statis- 
tics which  were  used  were  obtained  from  the  Iron  Age.^ 

Another  index  to  the  conditions  of  the  iron  and  steel  industry 
is  the  unfilled  orders  of  the  United  States  Steel  Corporation, 
which  were  published  quarterly  till  June,  1910,  and  since  then 
monthly.  The  freedom  with  which  cancellations  are  permitted 
in  the  steel  trade  lessens  the  value  of  these  figures,  but  they  may 
well  be  considered  in  connection  with  the  prices  of  Bessemer 
billets  or  other  steel  products. 

(14)  Copper.  This  commodity  is  in  the  same  class  as  iron  and, 
since  it  is  used  for  similar  purposes,  has  become  as  sensitive  a 
barometer.  The  greatest  demand  is,  of  course,  from  the  electrical 
industries.  Statistics  for  the  monthly  production  of  copper  in  the 
United  States  were  published  by  the  Copper  Producers'  Associ- 
ation from  January,  1909,  to  June,  19 14.  This  period  is  too  short 
to  permit  comprehensive  comparisons  to  be  made.  The  statistics 
for  the  average  price  of  electrolytic  copper,  as  given  by  the  Engi- 
neering and  Mining  Journal,  for  1903-08,  are  plotted  on  Chart  IV. 
The  general  movement  of  the  price  of  copper  was  similar  to  that 
of  the  price  of  pig  iron,  but  the  former  broke  in  March,  1907,  one 
month  earlier  than  pig  iron. 

(15)  Print  Cloth.  For  the  textile  industries  and  the  dry  goods 
trade  few  indices  are  now  available.  Price  quotations  and  weekly 
statements  of  the  sales  of  print  cloth  in  Fall  River  are  published 
in  the  New  York  Journal  of  Commerce  and  elsewhere.  These 
sales  statistics  are  not  strictly  accurate  and  there  is  no  check  to 
show  the  percentage  of  error.  They  should  indicate  roughly, 
however,  the  general  condition  of  the  trade  in  cotton  cloth.  Under 
ordinary  conditions  the  sales  are  in  part  for  future  delivery,  the 
deliveries  extending  over  two  or  three  months,  and  after  delivery 
the  cloth  must  be  converted,  that  is  printed.  Hence  the  volume 
of  sales  indicates  the  outiook  in  the  dry  goods  market. 

The  price  figures  represented  by  the  curve  on  Chart  V  are  the 
averages  of  the  Monday  quotations  for  28  inch,  64  x  64  print 
*  The  price  quotations  are  for  No.  2  Southern,  Cincinnati. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      1 1 1 

cloth.  The  activity  of  the  mills  and  the  strength  of  the  market 
in  1906-07  are  reflected  in  the  rise  in  price,  this  rise  holding  until 
after  the  panic  actually  occurred.  The  sales  had  been  heavy  in 
1906  and  the  first  half  of  1907,  and  fell  off  in  July  of  the  latter 
year  only  because  the  mills  were  getting  so  far  behind  on  their 
deliveries.  In  fact  premiums  were  being  offered  to  the  mills  on 
orders  for  immediate  delivery. 

This  demand  for  cotton  cloth  had  nearly  wiped  out  the  stocks 
of  cloth  on  hand  in  the  leading  primary  markets/  as  is  indicated 


Print  Cloth  — Stock 
.a,  ^_^   PsiMT  Cloth  —  Price 

by  the  curve  for  stocks  of  print  cloth  given  on  Chart  V.  These 
statistics  are  perhaps  not  as  accurate  as  those  for  sales,  but  un- 
doubtedly show  the  general  situation.  The  market  decline  to  the 
low  point  in  July,  1907,  is  especially  significant  when  considered 
in  connection  with  the  price  curve.  The  accumulation  of  stock 
after  the  panic  shows  that  it  was  then  that  over-production  oc- 
curred and  has  a  strong  bearing  upon  the  general  theory  of  crises. 
Another  index  of  the  condition  of  the  cotton  manufacturing 
industry  is  the  margin  between  the  price  of  raw  cotton  and  the 

^  The  primary  markets  are  New  York,  Boston,  Providence,  and  Fall  River. 
These  statistics  were  compiled  from  the  tables  in  several  editions  of  A.  B.  Shepper- 
son's  Cotton  Facts. 


1 1 2  BUSINESS  STATISTICS 

price  of  cloth.  This  is  found  by  deducting  from  the  price  of  cloth 
the  cost  of  the  quantity  of  raw  cotton  required  to  manufacture 
that  cloth.  This  margin  covers  the  manufacturing  expense  and 
the  manufacturer's  profits.  In  the  months  preceding  the  panics 
of  1893  and  1907,  there  was  in  each  instance  a  sharp  rise  in  this 
margin.^  The  margin  reached  its  lowest  point  when  the  depres- 
sion was  most  severe. 

(16)  Silk.  The  condition  of  the  silk  industry  should  be  shown 
approximately  by  the  imports  and  prices  of  raw  silk.  All  of  the 
raw  material  used  in  the  industry  in  this  country  is  imported,  and 
the  importations  adjust  themselves  fairly  closely  to  the  demand 
from  the  manufacturers.  In  fact  this  is  probably  a  better  index 
to  the  industry  than  any  figures  for  production  would  be,  since 
the  products  are  highly  diversified.  During  the  months  preced- 
ing the  panic  of  1907  relatively  large  imports  were  received  and 
there  was  a  marked  rise  in  price,  the  highest  point  being  reached 
in  May,  1907,  after  which  a  fall  began.^ 

(17)  Tin.  As  another  illustration  of  the  use  of  statistics  of 
imports  and  prices  for  a  raw  material  not  produced  in  the  United 
States,  tin  may  be  taken.^  The  domestic  production  of  this  com- 
modity is  negligible.  The  imports  of  tin,  like  those  of  silk,  fluctu- 
ate somewhat  irregularly,  owing  probably  to  the  irregularity  in 
the  arrival  of  the  ships  in  which  the  material  is  carried..  But  they 
were  heavy  in  1906  and  the  first  part  of  1907.  The  price  of  tin 
also  showed  a  striking  rise  during  the  boom  period  preceding  the 
panic  of  1907,  with  a  slight  break  in  June  and  the  beginning  of  a 
sharp  decline  in  August  of  that  year.'* 

(18)  Hides  and  Leather.  For  the  shoe  manufacturing  industry 
no  statistics  of  production,  sales,  or  prices  are  now  to  be  had,  and 

*  A  chart  showing  this  margin  for  the  years  1881-1910  is  given  in  my  book,  The 
Cotton  Manufacturing  Industry  of  the  United  States,  p.  1 74. 

^  The  statistics  for  imports  are  published  in  the  Monthly  Summary  of  Commerce 
and  Finance,  and  the  price  statistics  in  the  New  York  Journal  of  Commerce. 
^  Price  statistics  from  Engineering  and  Mining  Journal. 

*  The  statistics  from  which  these  conclusions  for  tin  are  drawn  were  collected  by 
several  students  in  my  class  in  Business  Statistics  in  the  Harvard  Graduate  School  of 
Business  Administration.  Other  students  have  collected  figures  on  cotton  cloth 
prices  and  margins  and  on  the  prices  of  hides  and  leather,  which  have  been  of  assist- 
ance. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      II3 

for  hides  and  leather  the  only  figures  are  for  prices.^  The  most 
sensitive  price  statistics  appear  to  be  the  quotations  for  Packers' 
No.  I  hides  and  Buenos  Aires  sole  leather.  Each  of  these  fluctuates 
with  the  conditions  in  the  industry,  and  in  1905  and  1906  both 
showed  a  general  upward  movement  which  culminated  in  January 
and  February,  1907.  The  drop  which  occurred  in  the  following 
months  presaged  still  greater  weakness  in  the  future. 

One  complex  phenomenon  stands  out  clearly  in  a  study  of  the 
price  movements  for  these  various  cormnodities.  The  breaks  in 
some  instances  preceded  the  panic  by  several  months,  whereas 
for  other  commodities  the  prices  held  up  till  the  panic  actually 
occurred.  Through  a  more  exhaustive  study  it  may  be  possible 
to  arrive  at  definite  conclusions  with  reference  to  the  laws  of 
sequence.  In  other  words,  a  correlation  may  be  established  which 
will  serve  as  an  accurate  index  to  events  likely  to  follow  in  the 
future.  For  this  purpose  an  investigation  of  the  changes  in  the 
prices  of  individual  representative  commodities  will  clearly  3deld 
better  results  than  a  study  of  a  composite  index  number  of  prices. 

(19)  Crops.  The  prosperity  of  the  country  is  dependent  in  no 
small  degree  upon  the  agricultural  crops.  Abundant  crops  mean 
better  supplies  of  food  for  the  population  and  more  raw  materials 
for  the  manufacturers  of  flour,  cotton  cloth,  and  other  products. 
They  also  mean  more  purchases  by  the  farmers  of  commodities 
of  all  sorts  and  more  freight  for  the  railroads.  Unless  the  agricul- 
tural sections  of  the  country  are  prosperous  business  is  inevitably 
duU. 

So  far  as  my  investigations  have  gone  it  appears  that  the  best 
index  to  the  farmer's  prosperity  is  the  average  yield  per  acre. 
True,  the  price  which  the  farmer  receives  is  an  important  factor, 
and  is  not  to  be  neglected.  But  the  higher  prices  in  years  of  short 
crops  are  beneficial  to  only  a  portion  of  the  farming  community. 
If  some  farmers  receive  relatively  large  amounts  for  their  crops 
while  others  have  their  incomes  seriously  curtailed,  the  gross 
amount  of  farmers'  purchases  is  not  greater  and  the  distribution 
is  not  normal.  An  even  distribution  is  most  beneficial  to  business 
in  general. 

*  Dun's  Review;  Shoe  and  Leather  Reporter, 


114  BUSINESS  ST  A  TISTICS 

There  is  the  additional  difficulty,  when  attention  is  given  chiefly 
to  the  prices  for  agricultural  products,  of  ascertaining  what  pro- 
portion of  the  crop  is  sold  at  each  price.  Just  how  much  the 
farmers  receive  is  more  or  less  in  doubt.  Further,  production 
is  to  be  watched  with  caution,  because  it  does  not  adjust 
itself  to  price  changes  in  the  same  way  as  the  production  of 
pig  iron,  for  instance.  The  forces  of  nature  influence  the 
agricultural  yield.  Although  further  investigation  is  needed 
to  prove  conclusively  whether  the  yield  per  acre  or  the  total 
yield  and  the  price  statistics  are  most  significant,  crop  statistics 
of  some  kind  clearly  ought  to  be  considered  in  any  study  of 
business  indices. 

(20)  Other  Items.  In  addition  to  the  above  indices  there  are 
several  others  for  which  statistics  may  be  had  after  some  delay 
or  for  which  incomplete  statistics  are  available.  Unemployment 
statistics  are  a  valuable  index,  as  is  proved  by  the  report  issued 
from  month  to  month  by  the  British  Board  of  Trade.  In  this 
country,  unfortunately,  no  unemployment  statistics  are  currently 
available.  The  Massachusetts  Bureau  of  Statistics  has  published 
quarterly  statements  on  unemployment  since  March,  1908.  The 
New  York  Bureau  of  Labor  keeps  monthly  records  of  unemploy- 
ment, but  up  to  the  present  time  these  have  been  published  only 
after  so  long  an  interval  as  to  give  them  little  more  than  historical 
interest. 

For  lumber  some  scattered  statistics  of  production  and  ship- 
ments are  published  and  also  some  price  statistics.  Unfortunately 
the  quotations  for  lumber  prices  in  trade  papers  are  not  altogether 
reliable.  Judging  from  the  statistics  given  in  Part  IV  of  the 
Bureau  of  Corporations'  Report  on  Lumber,  accurate  price  statis- 
tics for  certain  grades  of  lumber,  especially  for  the  common 
grades  of  fir  and  pine,  would  be  as  valuable  indices  as  are  the 
price  statistics  of  other  commodities. 

Newspaper  and  book-paper  prices  are  regularly  published,  but 
they  too  seem  to  be  unreliable.  Furthermore,  paper  is  sold  largely 
upon  contracts  extending  over  a  year  or  more,  so  that  the  prices 
are  somewhat  inflexible.  The  American  Pulp  and  Paper  Associ- 
ation has  been  collecting  reports  of  production  and  these  were  for 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      1 1 5 

a  time  published.^  From  such  material  as  is  available,  it  appears 
that  the  paper  trade  is  sensitive  to  fluctuations  in  general  business 
conditions.  The  volume  of  advertising  which  the  newspapers  and 
magazines  carry  varies  with  business  prospects  and  the  size  of 
the  publications  is  thereby  affected.  When  business  is  brisk  there 
is  also  a  greater  demand  for  paper  for  posters,  circulars,  adver- 
tising booklets  and  for  other  purposes.  For  advertising  itself  some 
statistics  are  available,^  but  not  enough  to  be  of  much  service  as 
yet. 

The  National  Association  of  Wool  Manufacturers  began  in 
December,  19 13,  to  collect  quarterly  reports  of  the  nmnber  of 
cards,  combs,  spindles,  and  looms  in  operation  and  idle  in  the 
woolen  and  worsted  mills.  If  these  reports  are  continued,  they 
should  prove  valuable  indices,  even  if  they  are  not  upon  a  monthly 
basis. 

It  is  apparent,  I  think,  from  what  has  been  stated  in  the  fore- 
going paragraphs,  that  there  is  now  abundant  material  for  experi- 
mentation on  this  subject  of  business  indices.  In  order  to  use 
these  statistics  properly  some  common  basis  of  comparison  is 
needed,  which  will  not  only  provide  a  conmion  denominator  but 
which  will  also  take  into  account  the  seasonal  fluctuations.  It  is 
of  vital  importance  to  know  whether  an  increase  or  a  decrease 
represents  a  normal  seasonal  fluctuation  or  whether  it  represents 
a  fundamental  change  in  conditions.  We  now  turn  to  a  critical 
examination  of  the  attempts  which  have  been  made  to  provide 
such  a  common  denominator  and  to  construct  business  barom- 
eters. 

Some  Methods  of  Business  Forecasting 

The  systems  of  business  forecasting  which  are  now  in  use  are 
open  to  criticism  in  two  directions:  (i)  their  selection  of  statistics 
and  (2)  their  statistical  methods.  Such  criticism  does  not  imply 
a  lack  of  appreciation  of  the  useful  service  done  by  these  "  barom- 
eters." Their  pioneer  work  has  been  especially  valuable  in  creat- 
ing amongst  business  men  a  more  wide-spread  interest,  and  a 
broader  recognition  of  the  fact  that  crises  and  depressions  are 
not  caused  by  politics  or  accidents. 

^  In  the  Paper  Trade  Journal.  2  Printers^  Ink  gives  monthly  tables. 


1 1 6  BUSINESS  STATISTICS 

(i)  Bahson^s  Composite  Plot.  One  of  the  best  known  business 
barometers  is  that  prepared  by  Mr.  Roger  W.  Babson,  who  also 
publishes  a  very  serviceable  compilation  of  monthly  statistics  on 
his  Desk  Sheet.  Statistics  for  twelve  subjects  are  used  in  the  prep- 
aration of  this  barometer,  —  (i)  immigration,  (2)  new  building, 
(3)  liabilities  of  business  failures,  (4)  bank  clearings,  exclusive  of 
New  York  City,  (5)  Bradstreet's  index  number  for  commodity 
prices,  (6)  surplus  reserves  of  the  New  York  Clearing  House 
banks,  (7)  foreign  money  rates,  (8)  domestic  money  rates,  (9) 
conditions  of  crops,  (10)  idle  cars,  (11)  political  factors,  (12) 
stock  market  conditions.  The  first  four  are  grouped  together  as 
representing  mercantile  conditions,  the  second  four  as  represent- 
ing monetary  conditions,  and  the  third  four  as  representing 
investment  conditions. 

From  what  has  been  said  in  the  preceding  pages  it  is  evident 
that  these  statistics  vary  greatly  in  significance.  Immigration, 
for  example,  is  a  much  less  reliable  index  than  bank  clearings  or 
domestic  money  rates,  and  idle  car  statistics  are  altogether 
unsatisfactory.  Furthermore,  the  methods  of  obtaining  statistics 
for  three  of  the  subjects  are  open  to  serious  criticism.  In  order  to 
get  an  index  for  foreign  money  rates  the  official  rates  of  the  Bank 
of  England,  Bank  of  France,  and  Reichsbank  are  averaged.  Such 
an  average  does  not  seem  to  me  statistically  sound,  since  the 
policies  of  these  banks  are  by  no  means  the  same.  The  Bank  of 
France,  for  instance,  sometimes  puts  a  premium  upon  gold 
deliveries  instead  of  changing  the  discount  rate.  For  crops  only 
com  and  wheat  statistics  are  used.  The  cotton  crop,  which  pro- 
vides about  one-fourth  of  our  exports  and  affects  so  large  a  section 
of  the  country,  is  not  included.  The  estimated  crops  of  corn  and 
of  wheat,  in  bushels,  are  added  together,  despite  the  fact  that  in 
this  way  com  is  given  a  weight  four  times  that  of  wheat,  which 
sells  at  considerably  higher  prices  per  bushel  and  is  more  of  a  cash 
crop.  Corn  should  be  given  a  weight  not  over  twice  that  of 
wheat.  As  previously  stated,  the  figures  for  total  production 
seem  to  me  less  satisfactory  for  this  purpose  than  the  average 
yield  per  acre.  "  PoUtical  factors,"  finally,  cannot  be  measured 
statistically,  and  to  include  such  a  subject  indicates  a  startling 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      llj 

disregard  for  scientific  method.  An  index  of  such  factors  could, 
at  best,  be  only  guess  work. 

Both  Babson's  selection  of  subjects  and  his  treatment  of  the 
figures  are  open  to  criticism.  If  only  twelve  subjects  were  to  be 
used  in  preparing  the  business  barometer,  these  twelve  should 
have  been  the  most  sensitive  and  the  most  trustworthy.  Bab- 
son's  selection  seems  to  me  to  fall  far  short  of  that  requirement. 
It  is  especially  notable  that  no  strictly  industrial  statistics  arei 
used.  The  selection  of  subjects,  however,  is  open  to  less  criticism* 
than  the  methods  of  manipulating  the  statistics. 

In  order  to  secure  a  common  basis  of  comparison  for  these 
diverse  denominations  and  to  eliminate  the  effects  of  seasonal 
fluctuations,  a  set  of  intermediary  "  scale  "  figures  was  worked 
out.^  Taking  immigration  for  illustration,  a  table  of  scale  figures 
was  prepared  for  each  month.  For  January  the  highest  and 
lowest  figures  for  the  month  of  January  during  the  years  of  1898- 
1908  were  found,  — 18,300  in  1901  and  56,200  in  1905.  The 
range  between  these  two  figures  was  taken  as  equal  to  100  points. 
The  difference  between  the  two  actual  figures  (37,900)  was 
divided  by  10.  By  adding  this  quotient,  3,790,  to  18,300,  the 
point  ten  "  degrees  "  above  the  lowest  was  found,  and  by  repeat- 
ing the  process  the  entire  scale  was  built  up  in  arithmetical  pro- 
gression until  it  reached  the  highest  actual  figure,  56,200.  The 
same  scheme  was  used  in  working  out  a  scale  for  each  month. 
For  February  the  lowest  and  highest  figures  for  immigration  in 
the  month  of  February,  1898-1908,  were  found  and  a  100  point 
scale  similarly  ascertained,  and  so  on  for  the  other  months.  Thus 
there  is  a  separate  scale  for  each  subject  for  each  month. 

To  quote  Mr.  Babson's  own  explanation:  ^  — "  We  then 
arrange  the  scale  figures  in  column,  placing  zero  over  the  column 
whose  average  approximates  most  closely  to  the  average  condi- 
tions of  the  years  1903  and  1904,  —  that  is  the  depression  follow- 
ing the  1903  panic.  This  date  is  taken  arbitrarily  as  the  starting 
point  of  the  Barometer.  We  then  place  our  index  figures  in  series 
to  the  left  and  right  of  zero.    If  the  volume  of  business  increases 

^  "  Preparing  the  Composite  Plot,"  Babson's  Reports,  191 2. 
2  Ibid. 


Il8  BUSINESS  STATISTICS 

SO  as  to  go  beyond  the  scale,  higher  scale  figures  are  added,  using 
the  same  arithmetical  progression  as  at  first,  so  that  the  actual 
condition  of  the  years  1 898-1 908  serves  as  a  constant  by  which  to 
compare  succeeding  years.  Scales  similar  to  this  one  on  immi- 
gration have  been  prepared  for  all  subjects.'* 

As  an  example  of  the  way  in  which  the  immigration  scales  for 
January,  February,  and  March  are  worked  out  the  following 
table  is  given: 


Jan. 

Feb. 

Mar. 

+60 

56,200 

68,700 

139,100 

+SO 

52,410 

64,170 

128,440 

+40 

48,620 

59,640 

117,780 

+30 

44,830 

55,110 

107,120 

+20     . 

41,040 

50,580 

96,460 

+10 

37,250 

46,050 

85,800 

0 

33,460 

41,520 

75,140 

—  10 

29,670 

36,990 

64,480 

—  20 

25,880 

32,460 

53,820 

-30 

22,090 

27,930 

43,160 

-40 

18,300 

23,400 

32,500 

On  each  scale  the  range  would;  not  necessarily  be  from  —  40  to 
-f  60,  but  in  every  case  it  would  have  a  range  of  100  points,  with 
the  lowest  actual  figure  for  that  month,  1898-1908,  at  the  bottom, 
the  highest  actual  figure  at  the  top,  and  "  zero  "  fixed  by  the 
figures  for  1903-04. 

This  scale  is  then  used  for  determining  the  index  figure  for  the 
current  month.  For  January,  19 14,  for  example,  the  number  of 
immigrants  was  44,700.  This  evidently  falls  between  +  20  and 
+  30  on  the  January  scale  for  immigration.  41,040  corresponds 
to  +  20  on  that  scale.  Subtracting  from  44,700,  the  difference  is 
3,660.  The  last  figure  is  then  di\dded  by  379,  which  is  the  value 
of  each  degree  on  the  scale.  The  quotient,  9.6,  is  added  to  -|-  20, 
giving  an  index  of  +  29.6  for  immigration  in  January,  1914. 

An  index  number  is  similarly  worked  out  for  each  of  the  sub- 
jects, by  finding  the  scale  figure  to  which  the  actual  figure  for  the 
month  of  January,  1914,  corresponds.  Each  month  in  each  year 
is  handled  in  the  same  way. 

For  business  failures,  surplus  reserves,  and  idle  cars,  inverted 
scales  are  used,  since  these  subjects  vary  inversely  with  business 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      II9 

conditions.  But  for  surplus  reserves,  when  the  figures  fall  below 
a  certain  point,  weakness  rather  than  strength  is  indicated; 
hence,  to  quote  Mr.  Babson  again,  "  below  $5,000,000  this  sub- 
ject is  put  upon  what  we  call  a  deficit  scale,  declining  quickly  to 
zero  as  the  reserves  are  wiped  out  and  reading  —  66  for  a  deficit 
of  $50,000,000,  as  in  November,  1907."  Similarly  "  when  money 
rates  for  the  best  commercial  paper  reach  about  5  per  cent  —  an 
average  occurring  only  in  a  period  of  excess  loans  —  the  scale 
figures  begin  to  work  downward  again,  for  the  '  lack  of  confi- 
dence '  shown  by  the  high  rate  overshadows  the  ^  excess  of  busi- 
ness '  feature  shown  by  a  majority  of  other  subjects.  On  this 
panic  scale  the  index  moves  to  —  60  rapidly  when  rates  advance 
from  5  per  cent  to  8  per  cent  or  above."  Both  of  these  scales  are 
purely  arbitrary  adjustments. 

Having  found  the  index  for  each  of  the  subjects  for  a  certain 
month  these  figures  are  averaged,  giving  double  weight  to  bank 
clearings,  domestic  money  rates,  and  the  stock  market  index. 
The  final  figure  thus  obtained  is  the  index  to  business  conditions. 
Before  undertaking  to  examine  the  use  which  is  made  of  this 
summary  figure,  let  us  make  a  critical  examination  of  this  method 
of  securing  index  numbers. 

In  the  first  place,  it  is  evident  that  the  index  numbers  are  in  no 
sense  percentages.  Since  the  lowest  point  is  not  zero,  they  do  not 
show  even  the  percentage  of  the  range  above  the  lowest  points. 
The  index  numbers  depend  upon  this  range  and  upon  the  location 
of  the  zero  point.  The  question  of  whether  or  not  1903-04  can 
fairly  be  assumed  to  have  been  representative  of  normal  condi- 
tions for  all  of  these  subjects  is  of  minor  importance.  The  heart 
of  the  problem  is  the  method  of  determinating  the  range  upon 
which  the  scale  figures  are  based. 

The  use  of  the  range  between  the  highest  and  lowest  figures  for 
each  month  over  a  ten-year  period  as  a  base  for  the  scale  figures 
presupposes  that  there  were  no  abnormally  high  and  no  abnor- 
mally low  figures  in  any  instance.  If  in  any  month  one  subject 
showed  an  exceptionally  high  figure  because  of  extraordinary 
circumstances  which  did  not  affect  the  other  subjects  and  which 
had  no  influence  in  other  months,  the  range  was  thereby  made 


I20  BUSINESS  STATISTICS 

abnormally  wide.  The  scale  figures  and  the  index  numbers  deter- 
mined from  such  a  range  are  not  properly  comparable  with  those 
for  other  subjects  and  for  other  months.  The  range,  in  other 
words,  may  be  said  to  have  been  placed  at  the  mercy  of  the 
extraordinary  events  during  this  ten-year  period.  As  a  matter  of 
fact,  a  little  experimenting  will  show  that  the  exclusion  of  a  single 
high  figure,  using  instead  the  one  next  in  order,  materially 
modifies  the  scale  figures  for  any  subject. 

Take  the  liabilities  of  business  failures,  which  showed  as  its 
high  point  $100,045,440  in  October,  1907.  The  greatest  force  of 
the  panic  was  then  felt  by  that  subject.  Although  in  the  follow- 
ing months  failures  were  heavier  than  prior  to  the  panic,  they  by 
no  means  exceeded  the  averages  for  the  respective  months  to 
anything  like  the  same  degree  as  in  October.  Consequently  the 
scale  for  liabilities  of  business  failures  for  October  is  not  fairly 
comparable  with  the  failures  scales  for  the  other  months.  Again, 
as  has  already  been  shown,  the  approach  and  the  effects  of  the 
crisis  were  not  felt  synchronously  to  the  same  degree  by  all 
the  subjects.  Domestic  money  rates,  for  example,  reached  their 
highest  point  in  December  in  1907,^  and  security  prices  their 
highest  point  in  September,  1906.  A  brief  examination  of  the 
statistics  for  the  other  subjects  will  show  that  there  was  no  such 
correlation  in  their  fluctuations  as  to  warrant  the  use  of  this 
method  of  establishing  a  common  basis  of  comparison  or  to  justify 
the  averaging  of  the  index  numbers. 

The  summary  index  figure  which  is  obtained  by  averaging  the 
index  figures  for  the  twelve  subjects  does  not,  therefore,  indicate 
the  percentage  of  anything,  nor  does  it  show  the  percentage 
change  from  month  to  month.  It  merely  gives  the  average  of  the 
figures  obtained  by  the  use  of  this  questionable  range-scale 
method. 

The  summary  figure  is  obtained  solely  for  making  the  Com- 
posite Plot.    The  theory  which  underlies  the  Composite  Plot  is 

^  From  the  explanation  which  has  been  given  of  the  "  deficit  scale  "  used  for 
money  rates  when  they  rise  above  5  per  cent,  the  latter  figure  must  have  been  taken 
as  the  maximum  in  fixing  the  scale.  If  this  same  plan  were  to  be  commonly  fol- 
lowed, the  scales  would  become  entirely  arbitrary,  depending  upon  the  judgment  of 
the  person  who  made  them  out. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      121 

that  in  business,  as  in  the  physical  sciences,  "  action  and  re- 
action "  are  equal  and  that  the  summary  index  figure  for  the 
twelve  subjects  measures  business  action  and  reaction  so  accu- 
rately that  we  can  foretell  the  amount  of  depression  which  will 
compensate  for  a  preceding  period  of  prosperity. 

Though  the  rhythmic  movement  in  trade  cycles  is  not  to  be  dis- 
puted, it  is  more  than  doubtful  whether  there  is  a  law  appli- 
cable to  our  ultra-complex  economic  life  which  causes  an  exact 
balancing  of  action  and  reaction.  Some  forces  may  tend  to  coun- 
terbalance each  other  at  one  time,  and  yet  not  at  another. 
Furthermore  there  may  be  long  delays  in  the  manifestations  of 
the  resultants  of  certain  forces.  And  even  granting  that  a  definite 
law  of  this  kind  is  at  work,  are  the  twelve  subjects  for  which 
statistics  are  used  by  Mr.  Babson  so  representative  of  all  business 
conditions  and  forces  that  we  can  base  hard  and  fast  conclusions 
upon  them  ?  Are  the  statistics  themselves  so  free  from  error 
that  they  can  serve  as  exact  measures  ?  Is  the  method  of  reduc- 
ing these  statistics  to  a  common  basis  so  scientifically  accurate 
that  the  final  composite  index  number  deserves  confidence  ?  It 
is  obvious  that  each  of  these  questions  must  be  answered  in  the 
negative. 

Finally,  the  Composite  Plot  itself  is  to  be  considered.  To 
obtain  this  the  summary  index  numbers  are  plotted  as  for  an 
ordinary  graph,  with  the  additional  provision  of  a  line  of  "  normal 
growth," — the  X — Y  line.  This  X — Y  line  is  an  essential  part 
of  the  Composite  Plot,  since  some  of  the  subjects  tend  to  show 
an  increase  from  year  to  year  in  consequence  of  the  growth  of  the 
country.  If  it  were  not  for  the  growth  of  the  country,  the  curve 
plotted  from  the  index  numbers  would  fluctuate  above  and  below 
a  straight  fine  parallel  to  the  base  line.  The  line  of  "normal 
growth,"  however,  must  move  upward  in  order  to  show  a  proper 
balance.^ 

As  the  summary  index  numbers  are  plotted  upon  the  chart,  a 
part  fall  above  the  X — Y  line  and  a  part  below.    There  develop, 

*  It  should  be  noted  that  for  five  of  the  twelve  subjects  there  is  no  normal  growth, 
but  only  fluctuations  around  the  constant  level.  Money  rates,  for  instance,  do  not 
necessarily  increase  with  the  growth  of  the  country. 


122  BUSINESS  STATISTICS 

consequently,  a  series  of  areas  bounded  by  this  curve  for  summary 
index  numbers  and  by  the  X — Y  line.  These  areas  alternate 
above  and  below  that  X — Y  line.  Those  above  are  positive  and 
represent  action;  those  below  are  negative  and  represent  reaction. 
Since  action  and  reaction  are  to  be  equal,  the  positive  and  nega- 
tive areas  must  be  equal.  They  are  not  regular  in  depth  or 
breadth  but  equal  only  in  area.  For  a  current  month  this  Com- 
posite Plot  is  assumed  to  show  the  position  in  which  the  business 
world  is  with  reference  to  the  business  cycle.  From  this  Plot,  it 
is  assumed,  one  can  judge  how  much  positive  or  negative  area 
can  be  expected  to  develop  before  a  change  sets  in.  The  Plot 
does  not  indicate  in  any  way  whether  this  development  is  likely 
to  be  rapid  or  slow,  whether  the  "  reaction  "  will  be  sharp  and 
quick  or  slow  and  long. 

Obviously  the  relative  size  of  the  areas  above  and  below  the 
X — Y  line  depends  upon  where  that  line  is  placed.  When  this 
Plot  was  first  published,  the  X — Y  line  was  straight.  Its  direc- 
tion had  been  determined  by  carrying  the  Plot  back  over  several 
years  and  drawing  the  Hne  of  normal  growth  in  such  a  way  that 
equal  positive  and  negative  areas  would  be  shown. 

Until  January,  1913,  the  line  continued  to  be  straight,  running 
diagonally  at  an  angle  of  about  ten  degrees  from  the  horizontal. 
Events,  however,  were  causing  unequal  areas  to  develop  and  a 
readjustment  was  necessary.  Modifications  in  the  direction  of 
the  X — Y  line  were  introduced,  causing  long,  irregular  fluctua- 
tions. Had  the  direction  of  the  line  remained  unaltered,  the 
appearance  of  the  plot  at  the  present  time  would  be  quite  dif- 
ferent. Now  the  direction  of  the  X — Y  Hne  is  changed  as 
occasion  requires.  To  quote  from  an  explanation  issued  by  the 
Babson  Statistical  Organization : 

"  After  considerable  study  of  the  different  subjects,  it  seems 
clear  that  the  subject  most  successful  as  an  indicator  ...  is  the 
volume  of  bank  clearings  for  the  country,  excluding  New  York. 
.  .  .  But  as  it  is  always  dangerous  to  use  one  subject  alone  and 
especially  a  subject  reflecting  surface  movements,  it  is  necessary 
to  take  bank  clearings  as  an  indicator  only,  and  to  check  conclu- 
sions based  upon  it  at  the  end  of  each  year  by  all  the  important 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      1 23 

barometers  of  wealth  which  are  reported  annually,  and  again  at 
the  end  of  each  cycle,  as  shown  by  the  areas  of  the  Composite 
Plot.  Therefore,  on  our  Composite  Plot,  the  line  X — Y  is  now 
drawn  so  as  to  make  the  areas  equal,^  with  special  attention  to 
the  cycles.''  ^ 

In  other  words,  without  offering  a  detailed  explanation,  the 
X — Y  Hne  is  now  adjusted  from  time  to  time  according  to  bank 
clearings,  one  of  the  twelve  subjects  used  in  obtaining  the  barom- 
eter figure,  and,  in  the  long  run,  the  line  is  drawn  so  as  to  make 
the  positive  and  negative  areas  equal.  In  last  analysis,  therefore, 
the  whole  scheme  turns  upon  the  X — Y  line,  which  is  readjusted 
more  or  less  in  accordance  with  what  the  manipulator  thinks 
'that  the  chart  ought  to  show. 

(2)  Brookmire's  system.  The  other  system  of  forecasting  which 
I  shall  examine  here  is  that  of  the  Brookmire  Economic  Chart 
Co.  In  this  system  there  are  three  composite  indices  and  no 
single  plot.  No  attempt  is  made  to  lay  down  rules  that  the 
indices  must  always  react  upon  each  other  in  the  same  way  or 
that  any  hard  and  fast  law  is  to  be  followed.  It  is  recognized  that 
many  forces  are  at  work  which  cannot  be  expressed  statistically 
but  which  must  be  taken  into  consideration  in  judging  the  prob- 
able course  of  business  conditions. 

In  obtaining  the  Business  Index  the  following  statistics  are 
used :  '  total  bank  clearings  in  the  United  States,  bank  clearings 
exclusive  of  New  York  City,  commodity  prices,  railroad  gross 
earnings,  new  building  (70  cities),  pig  iron  production,  pig  iron 
price,  price  of  Bessemer  billets,  unfilled  orders  of  United  States 
Steel  Corporation.  For  the  Stock  Market  Index,  the  average 
price  of  twenty  railroad  stocks  and  twelve  industrials  is  com- 
puted; and  for  the  Banking  Index,  use  is  made  of  loans,  deposits, 
reserves,  ratio  of  reserves  to  loans,  and  rate  on  commercial 
paper.'* 

^  The  italics  are  mine. 

2  "  How  the  Line  of  Normal  Growth  '  X-Y  '  of  the  Composite  Plot  is  Located," 
Babson^s  Reports. 

'  J.  H.  Brookmire,  "  Financial  Forecasting,"  Moody's  Magazine,  January,  1914, 
p.  8. 

*  Ibid.,  June,  1913,  p.  444. 


124  BUSINESS  STATISTICS 

The  method  of  reducing  these  statistics  to  a  common  basis  has 
been  explained  by  Mr.  Brookmire  as  follows:  "  In  combining 
these  banking  indices  it  was  necessary  to  create  a  common  scale 
on  which  to  place  each  index  before  averaging  them  all  together. 
I  decided  to  take  a  period  beginning  with  1900  and  find  the 
average  figure  for  each  index  taken.  This  '  normal '  or  *  zero  ' 
point  is  the  place  where  the  points  of  each  index  used  fall  half 
above  and  half  below  the  normal  line.  For  example,  the '  normal ' 
or  *  zero  '  point  of  the  loans  to  deposits  graph  is  98.5  per  cent  for 
the  period  1900  to  191 2.  This  '  normal '  or  '  zero  '  point  is  the 
starting  point  of  the  new  combined  index."  ^  That  is,  the  median 
is  apparently  used  as  the  standard  in  working  out  the  scale. 

In  criticizing  this  system  of  forecasting,  attention  is  first  to  be 
called  to  the  limited  number  of  subjects  included  and  to  the 
omission  of  all  crop  statistics.  But,  here  again,  the  main  criticism 
lies  against  the  technical  methods  used  in  making  adjustments  for 
seasonal  fluctuations  and  for  normal  growth.  For  those  statistics 
which  manifest  a  seasonal  fluctuation,  the  seasonal  variation  is 
calculated  and,  before  the  index  is  prepared,  the  statistics  are 
"  compensated  "  in  accordance  with  these  calculations.  Owing 
to  the  nature  of  the  statistics  a  certain  percentage  of  error  must 
be  involved  in  these  calculations  and  compensations. 

As  regards  "  normal "  growth,  the  rate  of  annual  increase  in 
those  figures  which  are  influenced  directly  by  the  progressive 
advance  of  the  country  is  also  calculated,  and  the  figures  are 
"  stepped  down  "  before  using.^  Since  so  many  diverse  forces 
affect  these  statistics,  a  rate  of  "  normal "  annual  increase  can, 
at  best,  be  only  an  approximation;  whereas  the  system  presumes 
to  make  a  nice  adjustment.  Obviously  both  the  "  compensation  '' 
and  the  "  stepping  down  "  are  somewhat  arbitrary,  depending 
more  or  less  upon  the  judgment  of  the  person  preparing  the  index. 
A  system  in  which  the  personal  element  is  dominant,  as  in  this 
case,  is  always  open  to  doubt.  It  does  not  tell  its  whole  story 
upon  its  face.3 

1  J.  H.  Brookmire,  "  Financial  Forecasting,"  Moody's  Magazine,  June,  1913, 
p.  444. 

2  Ibid. 

3  A  reply  to  these  criticisms  was  published  by  Mr.  Warren  F.  Hickernell,  editor 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      1 25 

Suggested  Method  of  Obtaining  Indices 

It  is  apparent,  from  the  criticisms  which  have  been  made  in  the 
preceding  section,  that  one  of  the  fundamental  problems  in  pre- 
paring indices  of  business  conditions  is  to  secure  a  common 
denominator  which  will  allow  for  normal  growth  and  seasonal 
fluctuations  without  leaving  any  of  the  adjustments  or  compen- 
sations to  personal  judgment  or  manipulation.  To  achieve  this 
end  I  suggest  the  following  method. 

For  each  subject  let  a  monthly  index  number  be  obtained  by 
dividing  the  actual  figure  for  the  month  by  the  average  for  that 
month  during  the  ten  preceding  years.  This  is  illustrated  by 
the  table  on  the  next  page,  which  gives  the  ten-year  monthly 
averages,  the  actual  figures,  and  the  index  numbers,  for  one  item, 
namely  bank  clearings,  exclusive  of  New  York  City,  the  period 
covered  being  the  years  1913  and  1914.  The  figures  for  clearings 
are  from  Bradstreefs. 

The  ten-year  average  for  the  month  of  January,  1903-12,  was 
$4,903,000,000;  the  actual  amount  for  January,  1913,  $6,739,- 
000,000.  Dividing  the  latter  by  the  former,  an  index  number  of 
137  is  obtained.  This  means  that  in  January,  1913,  bank  clear- 
ings were  37  per  cent  above  the  ten-year  average  for  that  month. 
The  ten-year  average  for  February,  1903-12,  was  $4,142,000,000 
and  the  actual  amount  in  February,  19 13,  $5,670,000,000,  which 
also  gives  an  index  number  of  137.  Similarly  for  each  month  in 
1913  the  actual  number  is  divided  by  the  average  for  that  month 
during  the  years  1903-1 2.  For  January,  1914,  the  actual  amount, 
$6,687,000,000  is  divided  by  $5,193,000,000,  the  ten-year  average 
for  January,  1904-13;  and  a  similar  base  is  used  for  the  other 
months  in  1914. 

By  means  of  this  moving  base  the  comparability  between  the 
index  number  for  December,  1913,  and  that  for  January,  1914, 
is  maintained.  The  basic  months  used  in  obtaining  the  index  for 
January,  1914,  bear  the  same  relation  to  the  basic  months  used  in 
obtaining  the  index  number  for  December,  1913,  that  the  latter 

of  the  Brookmire  Economic  Service,  in  Moody's  Magazine,  December,  1915,  pp. 

574-578. 


126  BUSINESS  STATISTICS 

bear  to  the  basic  months  for  November,  1913.  By  using  the  ten- 
year  monthly  averages,  seasonal  fluctuations  are  automatically 
allowed  for,  and  by  always  taking  the  ten  preceding  years  as  the 
base,  provision  is  made  for  normal  growth. 

The  ten-year  monthly  average  represents  a  normal  standard, 
whether  the  figures  tend  to  increase  or  to  fluctuate  about  a  con- 

Bank  Cleaeings 

Base 
(Average  for  Actual  Index 

Month  Month,  1903-12)1         Figures »  Number 

1913,  January    4,903  6,739  i37 

February   4,142  5,670  137 

March 4,728  6,100  129 

April 4,612  6,090  132 

May    4,565  6,025  132 

June    4,549  5,831  128 

July 4,639  6,080  131 

August   4,350  5,492  126 

September   4,407  5,841  132 

October 5,162  6,859  i33 

November   4,913  6,157  125 

December 5,041  6,536  130 

Base 

(Average  for 
Month,  1904-13)1 

1914,  January 5,193  6,687  129 

February   4,392  5,500  125 

March 4,985  6,263  126 

April 4,794  6,218  130 

May   4,732  5,797  122 

June    4,767  5,968  125 

July 4,872  6,180  127 

August   4,577  5,233  114 

September  4,657  5,269  113 

October 5,460  5,981  no 

November   5, 180  5, 551  106 

December 5,321  5,979  112 

stant  level.  For  the  purpose  in  hand  this  moving  base  seems 
superior  to  a  fixed  base  and  certainly  it  is  more  reliable  than  any 
arbitrary  scale.  It  may  prove  advisable  to  use  a  fifteen  or  a 
twenty-year  period  in  determining  the  bases,  in  order  to  reduce 
the  influence  of  exceptional  years.  The  principle,  however,  will 
remain  the  same.    The  ten-year  period  facilitates  the  use  of  those 

^  In  millions. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      IZJ 

Statistics  which  have  not  been  collected  for  a  longer  time  and, 
from  numerous  experiments  which  I  have  made  with  a  wide 
variety  of  statistics,  the  ten-year  period  appears  to  be  satisfactory. 

In  plotting  the  index  numbers  I  have^  in  each  case  represented 
ICO  by  a  heavy  line.  This  is  the  norm  shown  by  the  ten-year 
monthly  averages.  As  long  as  a  curve  remains  above  this  line,  the 
figures  are  above  normal,  that  is,  above  the  ten-year  average  for 
the  corresponding  months. 

The  general  method  is  illustrated  by  Charts  VI,  VII,  and  VIII, 
which  show  the  course  of  the  index  numbers  for  bank  clearings, 
railroad  gross  earnings,  number  of  business  failures,  commodity 
prices,  stock  market,  money  rates,  crops,  and  pig  iron.  The  war 
has  brought  hardships  untold  to  the  statistician  who  wishes  to 
study  the  indices  of  business  conditions.  It  has  led  to  the  dis- 
continuance of  certain  statistics,  and  a  change  in  the  form  of 
others.  The  Copper  Producers'  Association,  for  example,  ceased 
publishing  figures  for  the  production  of  copper.  The  Boston 
Transcript  reduced  the  number  of  stocks  used  in  obtaining  its 
barometer  from  twenty-five  to  twenty,  and  several  other  sets  of 
statistics  were  upset.  The  charts  here  represented  are  only  a  part 
of  those  which  have  been  worked  out  in  my  experiments,  but 
they  will  suffice  to  explain  this  method  of  presentation. 

The  bank  clearing  statistics  used  are  those  published  monthly 
by  Bradstreef  s  for  the  United  States  exclusive  of  New  York  City. 
The  statistics  for  the  number  of  business  failures  and  also  the 
index  number  for  commodity  prices  are  from  Bradstreet's,  Rail- 
road gross  earnings  are  for  ten  roads  as  given  on  Babson's  desk 
sheet.  The  stock  market  barometer  is  that  of  the  Boston  Tran- 
script, Money  rates  are  represented  by  the  average  monthly  rate 
on  60-90  day  commercial  paper  in  New  York.  For  each  of  these 
subjects  the  index  numbers  from  which  the  curves  were  plotted 
were  obtained  by  dividing  the  actual  monthly  figures  by  the 
averages  for  the  corresponding  months  during  the  ten  preceding 
years. 

For  pig  iron  an  index  number  for  production  was  worked  out 
upon  the  same  general  plan.  Then  in  the  same  way  an  index 
number  for  price.    In  order  to  get  a  single  index  number  for  pig 


128 


BUSINESS  STATISTICS 


iron  which  should  show  the  net  result  of  changes  both  in  produc- 
tion and  in  price  I  have  averaged  the  production  index  with  the 
price  index.  For  example,  the  production  index  for  January, 
1913,  was  157.5,  the  price  index  99.5,  and  the  average  index, 
therefore,  was  1 28.5.  It  may  prove  better  to  use  these  two  indices 
separately,  but  this  combined  index  seems  worth  trying  and 
watching. 

For  crops  the  index  number  has  been  prepared  first  for  winter 
wheat,  spring  wheat,  com,  and  cotton.    Other  crops  might  be 


■  Bank  Cieabings 

— -^  [Bailboad  Gbo6s  Earhinos 


added,  but  these  serve  to  represent  the  conditions  in  the  great 
agricultural  sections  of  the  country.  During  the  growing  season 
the  condition  reports  of  the  United  States  Department  of  Agri- 
culture are  used.  The  index  number  for  each  of  these  crops  for 
each  month  during  this  season  is  found  by  dividing  the  condition 
figure  for  the  month  by  the  ten-year  average  for  the  same  month. 
When  the  final  report  of  the  Department  of  Agriculture  is  issued 
the  yield  per  acre  is  taken  as  the  best  index  and  the  index  number 
for  each  crop  is  found  by  using  as  a  base  the  average  yield  per  acre 
for  that  crop  during  the  preceding  ten  years.     From  December, 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS       1 29 


r  M  A  iL  J 


^8.   6     N     O.  r     U   X~  U  A     BONO  F     UAU     J     J     ABO     N 

NU1.BER  or  |usujES| _  s,^  Mabot  BiaoM««a' 


IT 
Chart  VIII 


/ 


./:.: 


I\ 


\ 


\ 


\ 


\ 


\ 


\... 


■^ 


■■---■■■y 


MOJXBT   KATUt   ...,„_ ^.^PW  IboW 

Caom- 


130  BUSINESS  STATISTICS 

when  the  final  report  of  the  Department  of  Agriculture  is  issued, 
till  the  new  condition  reports  begin  in  the  following  spring,  the 
index  numbers  for  the  crops  remain  constant.  These  constant 
index  numbers  during  the  winter  and  early  spring  give  a  proper 
representation  of  conditions,  since  the  influence  of  the  crops  on 
the  markets  is  practically  without  change  during  that  time. 

After  the  index  for  each  of  these  crops  was  prepared,  a  weighted 
average  was  taken. ^  Winter  wheat  was  given  a  weight  of  one, 
spring  wheat  one,  cotton  two,  and  com  four.  This  weighting 
corresponds  roughly  to  the  relative  total  value  of  each  of  these 
crops.  The  final  weighted  average  was  taken  as  the  crop  index, 
which  was  to  represent  trade  conditions  in  the  leading  agricultural 
districts. 

Looking  at  the  charts  here  given,  it  is  apparent,  I  think,  that 
they  fairly  represent  some  of  the  conditions  prevailing  during 
this  period.  The  indices  for  bank  clearings  and  railroad  gross 
earnings  (Chart  VI)  correlate  closely  and  show  the  general  trend 
of  events.  The  number  of  business  failures  (Chart  VII)  has  been 
relatively  high  throughout,  jumping  sharply  upward  after  the 
outbreak  of  the  war.  As  regards  the  future,  in  view  of  the  length 
of  time  during  which  failures  have  been  relatively  heavy,  this  is  a 
favorable  indication;  there  has  been  an  unusually  severe  liquida- 
tion and  the  weak  spots  must  have  been  pretty  thoroughly  cleaned 
out.  The  price  index  tended  to  fall  until  the  war  came.  The 
stock  market  showed  continued  depression. 

Chart  VIII  is,  perhaps,  most  helpful  in  interpreting  the  general 
course  of  business  during  these  months.  The  rise  in  money  rates, 
in  the  early  part  of  1913,  was  due  to  the  Balkan  war.  This  was 
probably  one  of  the  primary  causes  of  the  business  depression 
which  began  in  the  United  States  early  in  1913.  The  decline 
later  in  the  year  was  accompanied  by  a  brightening  of  business 
prospects  in  the  fall  of  1913.  Most  industries  showed  an  appre- 
ciable improvement  about  September  of  that  year,  but  this 
improvement  did  not  hold.  The  sharp  decline  in  crop  prospects 
which  began  in  June,  1913,  at  just  the  time  when  the  index  for 

1  Further  experiments  are  being  carried  on  to  ascertain  whether  an  average  index 
or  a  separate  index  for  each  crop  is  more  satisfactory. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      131 

money  rates  was  at  its  highest  point  accentuated  the  depression 
which  was  setting  in  and  helped  to  cause  the  slight  crisis  of  that 
month.  The  relatively  poor  crops,  as  indicated  by  this  curve, 
show  why  there  was  not  more  recovery  in  the  fall  and  winter  of 
19 1 3  and  why  business  was  depressed  during  the  entire  spring  of 
1914.  Since  other  factors  were  favorable  and  the  crop  outlook 
brighter  in  the  summer  of  19 14  conditions  appeared  ripe  for  at 
least  a  moderate  business  recovery.  The  breaking  out  of  the 
European  war,  however,  suddenly  tightened  the  money  market 
and  upset  the  whole  business  world. 

The  pig  iron  index  is  added  to  this  chart,  not  as  an  index  of  all 
industry,  but  as  an  illustration  of  this  method  of  comparisons. 
One  of  the  merits  of  this  form  of  presentation  is  that  the  various 
factors  can  be  studied  separately  and  evaluated.  A  composite 
index  figure  for  numerous  diverse  subjects  may  cover  up  signifi- 
cant changes,  which  cannot  properly  be  considered  as  coimter- 
balancing  each  other. 

At  the  present  time  satisfactory  and  reliable  statistics  are 
available  for  only  a  very  few  industries.  We  have  no  adequate 
record  of  the  changes  which  are  taking  place  from  month  to 
month  in  the  symptomatic  manufacturing  industries  and  in  the 
wholesale  and  retail  trades.  But  before  we  can  thoroughly  under- 
stand the  complex  causes  of  industrial  crises,  we  must  know  vastly 
more  of  the  actual  conditions  in  various  industries  and  trades. 
Possibly  we  shall  no  longer  have  serious  panics,  thanks  to  our  new 
banking  system;  but  we  shall  unquestionably  be  subject  to 
fluctuations  in  industry,  and  probably  crises  will  recur  from  time 
to  time.  Measures  to  prevent  serious  depression  must  reach 
much  farther  than  to  the  banking  system.  Although  crises  are 
manifested  most  strikingly  in  the  financial  field,  which  serves  to 
bind  together  the  whole  business  world,  they  have  their  roots  and 
causes  in  industrial  conditions.  Hence  the  sooner  the  collection 
of  more  comprehensive  statistical  records  for  industry  and  trade 
is  begim,  the  earlier  can  we  acquire  a  thorough  knowledge  of  the 
fundamental  forces  which  affect  business  prosperity. 


132  BUSINESS  STATISTICS 

II.    CuRi^NT  Theory  Concerning  Business 

Cycles  ^ 

By  Wesley  C.  Mitchell 

types  of  the  early  theories  of  crises 

Serious  efforts  to  frame  a  theory  of  business  cycles  began  with 
the  contemporary  discussions  of  the  economic  crisis  of  182 5. ^ 
Differences  of  opinion  promptly  appeared  regarding  the  cause  of 
this  widespread  dislocation  of  trade  —  differences  which  multi- 
plied as  the  crises  of  later  years  brought  new  materials  and  new 
men  into  the  discussion.  Presently  crises  became  one  of  the 
accredited  topics  of  economic  theory,  and  systematic  writers 
began  to  develop  explanations  based  upon  their  doctrines  of  pro- 
duction, distribution,  and  exchange.  Before  the  end  of  the 
nineteenth  century  there  had  accumulated  a  body  of  observations 
and  speculations  sufhcient  to  justify  the  compilation  of  histories 
of  the  theories  of  crises.^ 

Inevitably,  the  early  efforts  to  account  for  the  exceedingly 
complex  phenomena  of  crises  were  crude  and  superficial.  But 
the  problem  commanded  so  much  attention  that  the  character  of 
the  treatment  rapidly  improved.  Each  recurring  crisis,  indeed, 
produced  a  fresh  crop  of  ill-considered  explanations;  but  mean- 
while other  writers  were  steadily  using  and  bettering  the  work  of 
their  predecessors.  In  this  process  of  elaboration,  however,  the 
early  differences  of  opinion  did  not  disappear.  Instead  they 
became  standardized  into  several  distinct  types  of  theory,  each 
represented  in  the  growing  literature  by  a  number  of  variants. 

First  may  be  put  the  view  that  crises  are  ^'  abnormal  "  phe- 
nomena, produced  by  some  disturbing  event  such  as  the  intro- 

^  Wesley  C.  Mitchell,  Business  Cycles,  pp.  3-6,  19-20.  Reprinted  by  per- 
mission of  University  of  California  Press. 

2  E.  von  Bergmann,  Geschichte  der  nationalokonomischen  Kris entheor ten  (Stutt- 
gart, 1895).  As  usual,  research  has  discovered  a  number  of  fragmentary  discussions 
by  earlier  writers.    See  the  opening  pages  of  von  Bergmann's  successive  chapters. 

2  Von  Bergmann's  book,  cited  in  the  preceding  note,  is  the  most  elaborate.  The 
best  histories  in  English  and  French  are  E.  D.  Jones's  Economic  Crises  (New  York, 
1900),  and  J.  Lescure's  Les  crises  generates  et  p^riodiques  de  sur production  (Paris, 
1907),  pp.  433-522. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      1 33 

duction  of  revolutionary  inventions,  the  development  of  new 
means  of  transportation  which  alter  old  trade-routes,  wars,  the 
revision  of  tariffs,  fluctuating  monetary  standards,  crop  failures, 
the  unexpected  bankruptcy  of  some  conspicuous  business  enter- 
prise, changes  in  fashion,  and  the  like.  Such  explanations  proceed 
upon  the  assumption  that  the  equilibrium  of  economic  activities 
has  become  so  delicate  that  it  may  be  disturbed  by  untoward 
conjunctures  of  the  most  dissimilar  kinds,  and  point  to  the  con- 
clusion that  each  crisis  has  its  own  special  cause  which  must  be 
sought  among  the  events  of  the  immediately  preceding  years.^ 

Next  in  formal  simplicity  is  the  type  of  theory  which  ascribes 
crises  to  "  inflation."  An  increase  in  coin,  in  irredeemable  paper 
money  issued. by  the  government,  in  bank-notes,  or  in  deposit 
currency  produces  an  advance  of  prices.  The  latter  stimulates 
business  to  great  activity,  which  runs  to  extremes  in  reckless 
investments  and  feverish  speculation,  and  ends  in  a  crash  of 
credit  and  widespread  bankruptcy. 

The  **  over-production  "  and  "  under-consumption  "  theories 
contend  that,  owing  to  the  efficiency  of  modem  machinery,  the 
power  of  society  to  produce  has  outstripped  its  power  to  consume. 
Hence  the  periodical  occurrence  of  "  general  gluts  "  —  paradoxi- 
cal situations  in  which  superabundance  causes  want.  Unable  to 
sell  their  increasing  output  of  goods  at  remunerative  prices, 
employers  are  forced  to  close  their  factories  and  turn  away  their 
hands  —  a  remedy  which  aggravates  the  disease  by  reducing  yet 
more  the  community's  power  to  purchase  for  consumption. 

To  the  classical  economists  the  theory  of  general  over-produc- 
tion was  a  heresy,  which  they  perseveringly  sought  to  extirpate 
by  demonstrating  that  the  supply  of  goods  of  one  sort  necessarily 
constitutes  demand  for  goods  of  other  sorts.  But  maladjusted 
production  they  allowed  to  be  possible,  and  their  theories  of 
crises  usually  sought  to  show  how  maladjustment  comes  about 
through  the  sinking  of  capital  in  unremunerative  investments. 
Such  locking-up  of  capital  was  often  held  to  be  one  result  of  "  the 
tendency  of  profits  to  a  minimum."    When  this  tendency  has 

^  Jones  gives  a  good  analysis  of  this  type  of  theories  in  his  second  chapter. 
Roscher  is  perhaps  the  best  known  representative. 


134  BUSINESS  STATISTICS 

reduced  the  current  rate  of  profits  to  an  unaccustomed  level,  the 
less  sagacious  capitalists  become  dissatisfied  and  embark  in  ill- 
considered  schemes.  There  results  the  production  of  goods  for 
which  no  market  can  be  found,  business  failures,  and  the  loss  of 
confidence  —  in  short,  a  crisis  which  extends  over  all  lines  of 
trade. 

Another  group  of  economists,  among  whom  Schaffle  was  promi- 
nent, accepted  ill-adjusted  production  as  the  cause  of  crises;  but 
accounted  for  it  by  the  complexity  of  modem  economic  organiza- 
tion. Not  only  are  manufacturers  compelled  to  produce  goods 
months  in  advance  for  a  market  whose  changes  they  cannot 
forecast,  but  investors  are  compelled  years  in  advance  to  put 
their  funds  into  enterprises  the  need  of  which  is  uncertain.  A 
close  coordination  between  supply  and  demand  is  not  possible. 
The  mistakes  which  are  made  should  be  ascribed  less  to  avoid- 
able errors  of  judgment  than  to  the  planlessness  of  capitalistic 
production. 

But  the  most  vigorous  attempt  to  prove  that  crises  are  a 
chronic  disease  of  capitalism  is  that  made  by  Rodbertus,  Marx, 
and  their  followers.  The  gist  of  the  socialist  contention  is  usually 
that  the  laborer  receives  as  wages  much  less  than  the  real  value 
of  his  product.  Hence  the  demand  for  consumers'  goods,  which 
must  depend  largely  upon  the  great  mass  of  wage-earners,  fails 
to  keep  pace  with  the  increase  of  the  output.  Meanwhile,  the 
capitalist-employers  are  investing  their  current  savings  in  new 
productive  enterprises,  which  presently  begin  to  add  their  quotas 
to  the  market  supply.  This  process  runs  cumulatively  until  the 
time  comes  when  the  patent  impossibility  of  selling  goods  at  a 
profit  brings  on  a  crisis. 

So  bald  a  statement  as  the  preceding  falls  far  short  of  doing 
justice  to  the  nineteenth  century  writers  upon  crises;  but  it 
suffices  to  indicate  the  foundations  upon  which  our  contem- 
poraries have  built  their  more  elaborate  explanations.  The  latter 
conserve  all  of  permanent  value  which  the  earlier  economists 
achieved,  and  contain  in  addition  certain  fresh  contributions  to 
the  subject. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      135 
CURRENT  THEORIES   OF  BUSINESS  CYCLES 

Two  Points  of  Agreement 

Wide  divergences  of  opinion  continue  to  exist  among  competent 
writers  upon  crises;  but  in  recent  years  substantial  agreement  has 
been  reached  upon  two  points  of  fundamental  importance. 

Crises  are  no  longer  treated  as  sudden  catastrophes  which 
interrupt  the  *'  normal  "  course  of  business,  as  episodes  which  can 
be  understood  without  investigation  of  the  intervening  years. 
On  the  contrary,  the  crisis  is  regarded  as  but  the  most  dramatic 
and  the  briefest  of  the  three  phases  of  a  business  cycle  —  pros- 
perity, crisis,  and  depression.^  Modem  discussions  endeavor  to 
show  why  a  crisis  is  followed  by  depression,  and  depression  by 
prosperity,  quite  as  much  as  to  show  why  prosperity  is  followed 
by  a  crisis.  In  a  word,  the  theory  of  crises  has  grown  into  the 
theory  of  business  cycles.^ 

This  wider  grasp  of  the  problem  has  discredited  the  view  that 
crises  are  due  to  abnormal  conditions  which  tempt  industry  and 
trade  to  forsake  their  beaten  paths  and  temporarily  befog  the 
judgment  of  business  men  and  investors,  or  to  misguided  legisla- 
tion, unsound  business  practices,  imperfect  banking  organization, 
and  the  like.^  As  business  cycles  have  continued  to  run  their 
round  decade  after  decade  in  all  nations  of  highly  developed 
business  organization,  the  idea  that  each  crisis  may  be  accounted 
for  by  some  special  cause  has  become  less  tenable.  On  the  con- 
trary, the  explanations  in  favor  today  ascribe  the  recurrence  of 
crises  after  periods  of  prosperity  to  some  inherent  characteristic 

^  The  not  infrequent  statement  that  prosperity  sometunes  merges  into  depression 
without  the  intervention  of  a  crisis  means  simply  that  the  writers  understand  by 
crisis  a  violent  disturbance  of  business  conditions.  It  is  in  closer  accord  with  every- 
day usage  to  call  such  occurrences  "  panics,"  and  to  apply  the  term  "  crisis  "  to  the 
transition  from  prosperity  to  depression  even  when  accomplished  quietly.  On  closer 
inspection,  a  business  cycle  is  often  found  to  be  complicated  by  minor  changes,  such 
as  the  interruption  of  depression  by  a  premature  resumption  of  activity,  the  occur- 
rence of  a  pause  or  even  a  slight  crisis  in  the  midst  of  prosperity,  and  the  like.  But 
for  the  present  it  is  wise  to  confine  attention  to  the  broadest  features  of  the  cycle. 

2  Compare  W.  Sombart,  "  Versuch  einer  Systematik  der  Wirtschaftskrisen," 
Archivfiir  Socialwissenschaft,  1904,  pp.  1-2 1. 

'  The  first  type  of  theories  mentioned  in  the  preceding  section. 


136  BUSINESS  STATISTICS 

of  economic  organization  or  activity.  The  complex  processes 
which  make  up  business  life  are  analyzed  to  discover  why  they 
inevitably  work  out  a  change  from  good  times  to  bad  and  from 
bad  times  to  good.  The  influence  of  special  conditions  is  admitted, 
of  course,  but  rather  as  a  factor  which  complicates  the  process 
than  as  the  leading  cause  of  crises. 

THE  METHOD   OF  INVESTIGATION 

Beveridge  ascribes  crises  to  industrial  competition,  May  to  the 
disproportion  between  the  increase  in  wages  and  in  productivity, 
Hobson  to  over-saving,  Aftalion  to  the  diminishing  marginal 
utility  of  an  increasing  supply  of  commodities,  Bouniatian  to 
over-capitalization,  Spiethoff  to  over-production  of  industrial 
equipment  and  under-production  of  complementary  goods,  Hull 
to  high  costs  of  construction,  Lescure  to  declining  prospects  of 
profits,  Veblen  to  a  discrepancy  between  anticipated  profits  and 
current  capitalization,  Sombart  to  the  unlike  rhythm  of  produc- 
tion in  the  organic  and  inorganic  realms.  Carver  to  the  dissimilar 
price  fluctuations  of  producers'  and  consumers'  goods,  Fisher  to 
the  slowness  with  which  interest  rates  are  adjusted  to  changes  in 
the  price  level. ^ 

*  In  order  to  bring  out  the  salient  points  which  differentiate  the  several  theories 
reviewed  above,  I  have  been  obliged  to  omit  much  effective  detail  and  all  corrobo- 
rating evidence.  In  particular  most  writers  show  how  the  operation  of  the  factors 
upon  which  they  lay  stress  is  reenforced  and  quickened  by  speculation.  Two  contri- 
butions to  this  important  aspect  of  the  subject  deserves  especial  mention  —  Petra- 
zycki's  book  on  speculation  and  joint-stock  companies,  and  Edward  D.  Jones's 
chapter  upon  the  psychology  of  crises.  L.  von  Petrazycki,  Aktienwesen  und  Speku- 
lation,  Berlin,  1906;  E.  D.  Jones,  Economic  Crises  (New  York,  1900),  ch.  ix. 

I  have  omitted  Pohle's  interesting  attempt  to  base  a  theory  of  crises  upon  the 
steady  growth  of  population  on  the  one  hand,  and  the  unsteady  growth  of  invest- 
ment on  the  other  hand,  because  he  has  recently  shifted  his  emphasis.  In  1902  he 
held  that  in  order  to  have  proper  equipment  ready  for  the  regular  number  of  new 
recruits  who  are  ever  joining  the  industrial  army,  it  is  necessary  to  produce  ma- 
chines, raw  material,  etc.,  in  larger  quantities  than  the  force  of  old  soldiers  can  use. 
But  the  irregularity  with  which  savings  are  invested  prevents  this  desideratum 
from  being  realized  every  year.  In  19 10  he  agrees  substantially  with  Spiethoff, 
holding  that  the  chief  cause  of  crises  is  the  inequality  in  the  formation  of  fixed  and 
circulating  capital,  adding  simply  that  the  economic  and  social  consequences  of 
crises  are  aggravated  by  the  regularity  with  which  population  increases  even  in 
times  of  depression.    Ludwig  Pohle,  Bevolkerungsbewegung,  Kapitalhildung,  und 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS      I37 

One  seeking  to  understand  the  recurrent  ebb  and  flow  of  eco- 
nomic activity  characteristic  of  the  present  day  finds  these 
numerous  explanations  both  suggestive  and  perplexing.  All  are 
plausible,  but  which  is  valid  ?  None  necessarily  excludes  all  the 
others,  but  which  is  the  most  important  ?  Each  may  account  for 
certain  phenomena;  does  any  one  account  for  all  the  phenomena  ? 
Or  can  these  rival  explanations  be  combined  in  such  a  fashion  as 
to  make  a  consistent  theory  which  is  wholly  adequate  ? 

There  is  slight  hope  of  getting  answers  to  these  questions  by  a 
logical  process  of  proving  and  criticizing  the  theories.  For  what- 
ever merits  of  ingenuity  and  consistency  they  may  possess,  these 
theories  have  slight  value  except  as  they  give  keener  insight  into 
the  phenomena  of  business  cycles.  It  is  by  study  of  the  facts 
which  they  purport  to  interpret  that  the  theories  must  be  tested. 

But  the  perspective  of  the  investigation  would  be  distorted  if 
we  set  out  to  test  each  theory  in  turn  by  collecting  evidence  to 
confirm  or  to  refute  it.  For  the  point  of  interest  is  not  the  validity 
of  any  writer's  views,  but  clear  comprehension  of  the  facts.  To 
observe,  analyze,  and  systematize  the  phenomena  of  prosperity, 
crisis,  and  depression  is  the  chief  task.  And  there  is  better 
prospect  of  rendering  service  if  we  attack  this  task  directly,  than 
if  we  take  the  roundabout  way  of  considering  the  phenomena 
with  reference  to  the  theories. 

This  plan  of  attacking  the  facts  directly  by  no  means  precludes 
free  use  of  the  results  achieved  by  others.  On  the  contrary,  their 
conclusions  suggest  certain  facts  to  be  looked  for,  certain  analyses 
to  be  made,  certain  arrangements  to  be  tried.  Indeed,  the  whole 
investigation  would  be  crude  and  superficial  if  we  did  not  seek 
help  from  all  quarters.  But  the  help  wanted  is  help  in  making  a 
fresh  examination  into  the  facts. 

periodische  Wirtschaftskrisen  (Gottingen,  1902);  "  Konjiinkturschwankungen  und 
Konjunkturberichterstattung,"  Zeitschrift  fiir  Socialwissenschaft,  January,  1910. 
Neither  have  I  thought  it  necessary  to  include  the  superficial  form  of  the  under- 
consumption theory  elaborated  by  Pierre  Vialles  in  La  consommation  et  les  crises 
iconomiques  (Paris,  1903).  Finally,  Mr.  H.  S.  Jevons's  ingenious  attempt  to 
revivify  his  father's  "  sun-spot  theory  "  scarcely  affords  a  convincing  explanation  of 
the  business  cycles  with  which  this  book  is  chiefly  concerned.  ("  Trade  Fluctuations 
and  Solar  Activity,"  Contemporary  Review,  August,  1909.) 


138  BUSINESS  STATISTICS 

III.   Government  Crop  Reports  ^ 

Bureau  of  Crop  Estimates,  U.  S.  Department  of  Agriculture 

Value  of  Crop  Estimates 

The  practical  value  of  the  Government  crop  estimates  results 
from  the  fact  that  they  are  based  upon  reports  of  farmers  and 
others  in  every  county  and  township  in  the  United  States  and 
upon  reports  of  trained  field  agents  in  each  State;  they  are  made 
monthly  during  the  crop  season;  they  are  checked  up  from  every 
possible  source  of  information;  the  final  reports  are  prepared  and 
issued  by  a  crop-reporting  board  of  experts;  and  all  Government 
employees  engaged  in  the  preparation  of  the  crop  estimates  are 
prohibited  by  law  from  giving  out  information  concerning  them 
or  in  utilizing  information  so  obtained  for  their  own  benefit 
directly  or  indirectly  prior  to  the  date  and  hour  of  publication,  so 
that  the  reports  when  issued  are  known  to  be  as  accurate  as  it  is 
practicable  to  make  them,  as  well  as  impartial,  disinterested,  and 
therefore  dependable.  No  public  organization,  and  certainly  no 
private  corporation  in  the  United  States  and  probably  in  the 
world,  is  so  well  organized  and  equipped  for  the  work  of  reporting 
on  crop  conditions  and  prospects  as  the  present  Bureau  of  Crop 
Estimates. 

Without  such  a  system  of  Government  crop  estimates,  specu- 
lators interested  in  raising  or  lowering  prices  of  farm  products 
would  issue  so  many  conflicting  and  misleading  reports  that  it 
would  be  practically  impossible  for  anyone,  without  great  expense, 
to  form  an  accurate  estimate  of  crop  conditions  and  prospects. 
Farmers  would  suffer  most  from  such  conditions,  because  they 
are  not  so  well  organized  as  other  lines  of  business  nor  are  they  in 
a  position  to  take  advantage  of  fluctuations  in  market  prices. 

Farmers  are  benefited  by  the  Government  crop  reports  both- 
directly  and  indirectly;  directly,  by  being  kept  informed  of  crop 
prospects  and  prices  outside  of  their  own  immediate  districts,  and 
indirectly,  because  the  disinterested  reports  of  the  Government 

^  Government  Crop  Reports:  Their  Value,  Scope  and  Preparation,  United  States 
Department  of  Agriculture,  Bureau  of  Crop  Estimates,  Circular  17,  Revised,  pp. 
8-26. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 39 

tend  to  prevent  the  circulation  of  false  or  misleading  reports  by 
speculators  who  are  interested  in  controlling  or  manipulating 
prices. 

The  fanner  cannot,  by  refusing  to  report  the  condition  of  crops 
for  his  locality,  prevent  buyers  and  speculators  from  knowing  the 
condition  of  the  crop.  It  is  well  known  that  speculators  and  large 
dealers  in  farm  products  do  not  depend  entirely  upon  Govern- 
ment reports  for  information  concerning  crop  prospects.  They 
maintain  regular  systems  of  their  own  for  collecting  crop  informa- 
tion. They  have  traveling  agents  and  correspondents  (usually 
local  buyers)  throughout  the  United  States  who  keep  them  posted, 
and  the  large  buyer  or  speculator,  in  return,  gives  these  local 
buyers  or  correspondents  information  in  regard  to  general  con- 
ditions and  prices.  The  local  buyers  know  the  conditions  of  crops 
in  their  own  vicinity  better,  as  a  rule,  than  the  average  farmer, 
because  it  is  their  business  to  keep  well  informed. 

If  the  Government  crop  estimates  should  be  discontinued  the 
farmer  would  have  no  reliable  information  concerning  crop  pros- 
pects except  in  his  own  immediate  neighborhood,  and  for  crop 
prospects  in  other  localities  he  would  have  to  depend  upon  such 
information  as  interested  speculators  and  dealers  might  choose  to 
publish  in  the  newspapers,  which  might  or  might  not  be  correct. 
Prices  in  his  own  local  market  are  influenced,  as  a  rule,  more  by 
the  condition  of  the  whole  crop  throughout  the  State  or  the 
United  States,  and  even  in  foreign  countries,  than  they  are  by  local 
conditions.  The  entire  wheat  crop  of  his  county  may  be  destroyed 
and  yet  prices  may  be  low,  or  his  county  may  have  a  bumper  crop 
and  prices  be  unusually  high,  depending  upon  whether  or  not 
there  is  a  surplus  or  deficiency  in  the  entire  crop  elsewhere.  In  a 
sense  the  Bureau  of  Crop  Estimates  is  a  form  of  farmers'  coopera- 
tion, wherein  each  farm  crop  reporter  gives  information  about  his 
locality  and  in  return  receives  information  about  the  entire 
country,  the  bureau  merely  acting  as  a  clearing  house  for  such 
cooperative  exchange. 

Some  of  the  private  crop  reports  which  are  published  in  the 
newspapers  are  honestly  prepared  and  are  more  or  less  accurate, 
depending  upon  the  extent  and  sources  of  information;  on  the 


140  BUSINESS  STATISTICS 

other  hand,  misleading  crop  reports  are  known  to  be  frequently 
circulated  in  order  to  raise  or  lower  prices  in  the  interest  of  specu- 
lators. If  the  farmer  reads  the  crop  estimates  and  forecasts  of 
the  Government  as  they  are  issued  he  will  be  in  a  position  to 
judge  for  himself  what  the  crop  prospects  are,  as  well  as  probable 
prices,  so  that  he  can  decide  intelligently  how  to  market  his  prod- 
uce and  how  to  deal  with  the  local  buyers.  Even  the  farmers 
who  do  not  keep  posted  are  indirectly  benefited  by  the  publica- 
tion of  Government  crop  estimates,  because  these  estimates 
automatically  tend  to  check  and  lessen  the  injurious  effects  of 
false  reports  sent  out  broadcast  by  interested  speculators  and 
their  agents,  in  the  same  way  that  a  police  or  constable  force 
tends  to  check  but  not  entirely  prevent  crime  in  a  community. 

The  more  certainty  there  is  as  to  the  probable  supply  and 
demand  the  less  chance  for  speculation  and  loss  in  the  business  of 
distributing  and  marketing  the  crop,  which  is  a  benefit  both  to 
the  producer  and  to  the  consumer. 

Large  manufacturing  firms,  agricultural  implement  and  hard- 
ware companies,  who  neither  buy  nor  sell  farm  products,  are 
much  interested  in  crop  prospects.  This  knowledge  enables  them 
to  distribute  their  wares  economically,  sending  much  to  sections 
where  crops  are  good  and  farmers  will  have  money  with  which  to 
buy,  and  less  to  sections  where  crops  are  short  and  farmers  will 
have  less  to  spend.  Few  farmers  realize  how  much  is  saved  by  an 
even  distribution  of  manufactured  articles  according  to  crop 
prospects.  If  manufacturers  avoid  heavy  losses  from  improper 
distribution,  they  can  afford  to  sell  on  better  terms,  with  resulting 
benefit  to  farmers. 

The  railroads  of  the  country,  which  move  crops  from  the  farm 
to  the  market,  must  know  in  advance  the  probable  size  of  the 
crop  in  order  to  provide  a  sufficient  number  of  cars  to  handle  it 
effectively  and  without  delay.  Cases  are  not  infrequent  when 
prices  of  grain  at  railroad  stations  are  reduced,  or  there  is  abso- 
lutely no  sale  for  the  grain,  because  cars  are  not  available  for 
shipping,  the  farmer  thus  being  among  the  sufferers. 

Prompt  and  reliable  information  regarding  crop  prospects  is 
equally  important  and  valuable  in  the  conduct  of  commercial, 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     I41 

industrial,  and  transportation  enterprises.  The  earlier  the 
information  regarding  the  probable  production  of  the  great 
agricultural  commodities  can  be  published,  the  more  safely  and 
economically  can  the  business  of  the  country  be  managed  from 
year  to  year. 

Retail  dealers  in  all  lines  of  goods,  whether  in  the  city  or  in  the 
country,  order  from  wholesale  merchants,  jobbers,  or  manufac- 
turers, the  goods  they  expect  to  sell  many  weeks  and  frequently 
many  months  before  actual  purchase  and  shipment.  Jobbers 
follow  the  same  course,  and  manufacturers  produce  the  goods  and 
wares  handled  by  merchants  of  every  class  far  ahead  of  the  time 
of  their  actual  distribution  and  consumption.  It  is  therefore 
important  that  they  have  the  earliest  information  possible  with 
respect  to  crop  prospects  and  the  probable  purchasing  power  of 
the  farmers. 

With  such  information  carefully  and  scientifically  gathered  and 
compiled,  and  honestly  disseminated,  so  that  it  can  be  depended 
upon  to  be  as  accurate  as  any  forecast  or  estimate  can  possibly  be^ 
and  relied  upon  as  emanating  from  an  impartial  and  disinterested 
source,  the  farmers,  the  merchants,  the  manufacturers,  and  the 
transportation  and  distributing  agencies  of  the  country  can  act 
with  a  degree  of  prudence  and  inteUigence  not  possible  were  the 
information  lacking. 

Scope  of  Crop  Reports 

Beginning  with  planting,  data  are  gathered  and  reports  made  as 
to  the  condition  and  acreage  of  each  of  the  principal  agricultural 
products,  such  as  com,  wheat,  oats,  rye,  barley,  potatoes,  hay, 
cotton,  tobacco,  rice,  etc.  As  the  crops  progress  the  prospects 
are  reflected  in  monthly  condition  reports  upon  each  growing 
crop;  such  reports  being  expressed  in  percentages,  100  repre- 
senting a  normal  condition.  Condition  reports,  expressed  in 
percentages  of  a  normal,  when  published,  are  coupled  with  a 
statement  of  the  averages  of  similar  reports  at  corresponding 
dates  in  preceding  years  (usually  lo-year  averages);  by  such 
comparison  the  condition  of  crops  in  comparison  with  the  average 
condition  is  readily  obtained.    At  harvest  time  the  yields  per 


142  BUSINESS  STATISTICS 

acre  are  ascertained,  which,  being  multiplied  by  the  acreage 
figures  already  ascertained,  give  the  production. 

The  tabulation  which  appears  on  pages  144  and  145  is  de- 
signed to  show,  in  abbreviated  form,  the  scope  of  monthly  crop 
reports  of  the  Bureau  of  Crop  Estimates,  in  1914,  and  the  time 
and  nature  of  inquiry  for  each  crop.  Slight  modifications  may 
be  made  from  time  to  time.  Characters  are  placed  under 
months  in  which  reports  are  published.  Explanatory  key  is 
given  at  the  top  of  the  tabulation. 

Methods  of  Crop  Reporting 

The  reports  issued  by  the  Bureau  of  Crop  Estimates  during  the 
year  include  data  relating  to  acreages,  conditions,  yields,  suppUes, 
quahties,  and  values  of  farm  crops,  numbers  by  classes,  condition, 
and  values  of  farm  animals,  etc.  The  data  upon  which  such  esti- 
mates are  based  are  obtained  through  a  field  service  consisting  of 
a  corps  of  paid  State  field  agents  and  crop  specialists  and  a  large 
body  of  voluntary  crop  reporters  composed  of  the  following 
classes:  County  reporters,  township  reporters,  individual 
farmers,  and  several  lists  of  reporters  for  special  inquiries. 

The  field  service  consists  of  trained  field  agents,  one  assigned 
to  a  single  State  or  group  of  smaller  States  which  in  the  aggregate 
corresponds  in  area  and  crop  production  to  one  of  the  larger 
States,  who  devote  their  entire  time  to  the  work  and  who  travel 
throughout  their  territory  during  the  crop  season,  personally 
inspecting  crop  areas,  conferring  with  State  and  local  authorities, 
private  and  commercial  agencies,  and  others  interested  in  crop- 
reporting  work.  Each  agent  supplements  his  own  observation 
with  reports  from  a  corps  of  selected  crop  reporters  in  his  terri- 
tory, who  report  directly  to  him  and  are  wholly  independent  of 
the  regular  crop  reporters  who  report  directly  to  the  bureau. 

In  addition  to  the  regular  force  of  State  field  agents  the  bureau 
has  a  small  force  of  crop  specialists,  one  or  more  for  each  of  the 
important  special  crops,  such  as  cotton,  tobacco,  rice,  and  truck 
crops,  possessing  the  same  quaHfications  and  performing  the 
same  duties  as  the  field  agents,  but  devoting  their  entire  time  to 
specializing  on  the  particular  crops  to  which  they  are  assigned 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     I43 

and  traveling  throughout  the  entire  region  in  which  they  are 
grown.  These  crop  speciaUsts  also  have  selected  lists  of  crop 
correspondents  reporting  directly  to  them. 

Both  the  State  field  agents  and  the  crop  specialists  are  in  the 
classified  service  and  are  appointed  only  upon  certification  by  the 
Civil  Service  Commission  after  a  rigid  competitive  examination. 
They  are  selected  for  their  special  training  and  qualifications  for 
the  work  and,  as  they  acquire  knowledge  and  experience,  will 
become  recognized  authorities  in  crop  production  in  each  State. 

There  are  approximately  2,800  counties  of  agricultural  impor- 
tance in  the  United  States.  In  each  the  department  has  a  princi- 
pal county  reporter  who  maintains  an  organization  of  several 
assistants.  These  county  reporters  are  selected  with  special 
reference  to  their  qualifications  and  constitute  an  efficient  branch 
of  the  crop-reporting  service.  They  make  the  county  the  geo- 
graphical unit  of  their  reports,  and,  after  obtaining  data  each 
month  from  their  assistants  and  supplementing  these  with  infor- 
mation obtained  from  .their  own  observation  and  knowledge, 
report  directly  to  the  department  at  Washington. 

In  practically  all  of  the  townships  and  voting  precincts  of  the 
United  States  in  which  farming  operations  are  extensively  carried 
on  the  department  has  "  township  "  reporters  who  make  their 
immediate  neighborhood  area  with  which  they  are  personally 
familiar  the  geographical  basis  of  reports,  which  they  also  send 
directly  to  the  department  each  month.  There  are  about  32,000 
township  reporters. 

Finally,  at  the  end  of  the  growing  season  a  large  number  of 
individual  farmers  and  planters  report  on  the  results  of  their  own 
individual  farming  operations  during  the  year;  valuable  data  are 
also  secured  from  30,000  mills  and  elevators. 

Because  of  the  specialized  nature  of  the  cotton  crop  the  reports 
concerning  it  are  handled  separately  from  reports  on  all  other 
crops.  In  addition  to  the  regular  estimates  of  the  State  agents, 
the  cotton  crop  specialist,  and  the  county  and  township  reporters, 
the  bureau  obtains  reports  on  acreage,  yields,  percentage  ginned, 
etc.,  from  many  thousand  special  reporters  who  are  intimately 
concerned  in  the  crop,  including  practically  all  the  ginners. 


144 


BUSINESS  STATISTICS 


Table  Showing  the  Scope  of  the  Work  Involved  in  the  Preparation  of  the 

Several  Crop  Reports 

[Key:  (A)  Acreage;  (%a)  acreage  in  per  cent  of  last  year;  (b)  number  of  breeding  sows  compared  with  last  year; 
(c)  condition;  (d)  losses  from  disease;  (e)  losses  from  exposure;  (F)  final  estimates  (acreage,  production,  value); 
(f)  per  cent  of  crops  shipped  out  of  county  where  grown;  (h)  number  stock  hogs  compared  with  year  ago;  fl)  cut 
for  silos;  (m)  per  cent  of  crop  of  merchantable  quality;  (n)  number;  (?)  production;  (%p)  per  cent  of  full  crop 
produced;  (q)  quality;  (r)  acreage  remaining  after  abandonment;  (s)  supplies  on  farms;  (v)  values;  prices  of 
products  marked  (v+)  in  January  are  asked  each  month;  (w)  weight  per  bushel  —  or  fleece;  (Y)  yield  per  acre  — 
or  colony.] 


Crop 


Jan. 


Mar. 


Apr. 


May 


June 


July 


Aug. 


Sept. 


Oct. 


Nov. 


Cereals: 

Barley 

Buckwheat .... 

Com 

Oats 

Rice 

Rye 

Wheat  (all) . . . . 
Wheat  (spring) . 
Wheat  (winter) . 

Forage  (grasses): 
Alfalfa,  hay .  . .  . 

Alfalfa,  seed 

Blue  grass,  seed . 
Canadian  peas .  . 
Clover,  hay .... 
Clover  seed .... 

Cowpeas 

Hay  (aU) 

Hay  (tame) .  .  . . 

Hay  (wild) 

Kafir  com 

Meadows 

MiUet 

Pastures 

Timothy,  hay . . 


Fruits: 

Apples 

Apricots,  California. 

Blackberries 

Cantaloupes 

Cranberries 

Grapefruit,  Florida . 

Grapes 

Lemons,  California. 

Limes,  Florida 

Olives,  California . .  , 

Oranges 

Peaches 

Pears 

Pineapples,  Florida. 


v+ 

sf 

v+ 

v+ 

sfm 

v+ 

sf 

v+ 

v+ 

sf 

v+ 
v+ 


v+ 
v+ 


v+ 
v+ 

v+ 
v+ 

v+ 

v+ 
v+ 

v+ 


Ac 


Ac 


c 
c 

%ac 


sc 
Ac 

c 

sc 

c 
APq 

c 
Pq 


c 

Y%p 

c 

Ac 
A 
A 

c 

c 
c 
c 


c 
c 

%p 

c 


%pv 


%p 


%ac 

c 

Pq 
Pq 
Pq 

c 


c 

%P 


c 

%p 
%p 

c 
c 

cv 
c 
c 
c 
c 

%pqv 


Pq 

c 

c 
Pq 

c 


Pq 

Y%p 
%P 

c 
c 

%P 
%P 


Pq 

sPql 
w 


Y%p 
%P 


Y%p 


%pq 


Y%p 

c 
%pqv 

c 

c 


%pqv 

V 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS 


HS 


Table  Showing  the  Scope  of  the  Work  Involved  in  the  Preparation  of  the 
Several  Crop  Reports  (continued) 


Crop 


Jan. 


Mar. 


Apr. 


May 


June 


July 


Aug. 


Sept. 


Oct. 


Nov. 


Dec. 


Fruits  (continued): 
Prunes,  California. 

Raspberries 

Strawberries 

Watermelons 


Vegetables: 

Beans  (dry) 

Beans  flima) 

Beans  (velvet),  Florida, 

Cabbages 

Cauliflower,  California. 

Celery,  California 

Onions .  .  .  . ' 

Potatoes 

Sweet  potatoes 

Tomatoes 


Miscellaneous: 

Almonds,  California 

Broom  com 

Cotton 

Flaxseed 

Hemp 

Honey 

Hops 

Peanuts 

Planting 

Plowing 

Sorghum 

Sugar  beets 

Sugar  cane 

Tobacco 

Walnuts  (English),  California. 
Wool 


Live  Stock: 

Horses 

Mules 

Milch  cows 

Other  cattle 

All  cattle 

Sheep 

Lambs 

Swine 

Honey  bees,  colonies . 


v+ 


v+ 


v+ 
v+ 
v+ 


v+ 
v+ 
v+ 


v+ 
v+ 
v+ 


v+ 


nv4- 

nv 

nv+ 

nv+ 

nv+ 
v+ 
nv+ 


c 
c 

%p 


%p 


c 

%ac 


do 


dec 
dec 
de 
deb 


c 

%P 
c 


c 

Ac 
Ac 
cv 


%ac 
c 
c 

Ac 
c 


c 

%p 


%p 


he 


%P 


%P 
%P 

c 
Y%p 


Y%p 

c 

c 
%pv 


c 

Y%p 

c 

c 
Y%p 

Yq 
c 


Pq 
Pq 


%P 


Pq 


Y%pq 


Pq 

%pv 
%P 


%P 


%aYp 
%P 


Note.  —  Reports  of  prices  are  also  obtained  monthly  for  butter,  eggs  chickens,  milk,  veal  calves,  timothy  seed, 
cottonseed,  cottonseed  meal,  and  bran;  for  soy  beans  in  January,  February,  October,  November,  and  December; 
for  black  walnuts,  hickory  nuts,  pecans,  and  turkeys  in  January,  October,  November,  and  December;  for  turnips 
and  pop  com  in  January,  Febmary,  November,  and  December;  for  maple  sugar  and  maple  simp  in  March,  April, 
May,  and  June;  for  chestnuts  in  October,  November,  and  December;  and  for  cane  simp  and  sorghum  simp,  in 
Florida,  in  December. 


146  BUSINESS  STATISTICS 

Transmission  of  Reports  to  Bureau  by  Correspondents 

Previous  to  the  preparation  and  issuance  of  the  bureau's 
reports  each  month  the  correspondents  of  the  several  classes  send 
their  reports  separately  and  independently  to  the  department  at 
Washington. 

In  order  to  prevent  any  possible  access  to  reports  which  relate 
to  speculative  crops,  and  to  render  it  absolutely  impossible  for 
premature  information  to  be  derived  from  them,  all  of  the  reports 
from  the  State  field  agents,  as  well  as  those  from  the  crop  spe- 
cialists, are  sent  to  the  Secretary  of  Agriculture  in  specially  pre- 
pared envelopes.  By  an  arrangement  with  the  postal  authorities 
these  envelopes  are  delivered  to  the  Secretary  of  Agriculture  in 
sealed  mail  pouches.  These  pouches  are  opened  only  by  the  Secre- 
tary or  Assistant  Secretary,  and  the  reports,  with  seals  unbroken, 
are  immediately  placed  in  a  safe  in  the  Secretary's  office,  where 
they  remain  sealed  until  the  morning  of  the  day  on  which  the 
bureau  report  is  issued,  when  they  are  delivered  to  the  statistician 
by  the  Secretary  or  the  Assistant  Secretary.  The  combination  for 
opening  the  safe  in  which  such  documents  are  kept  is  known  only 
to  the  Secretary  and  the  Assistant  Secretary  of  Agriculture. 
Reports  from  field  agents  and  crop  specialists  residing  at  points 
more  than  500  miles  from  Washington  are  sent  by  telegraph, 
in  cipher.  The  reports  from  the  county  correspondents,  town- 
ship correspondents,  and  other  voluntary  crop  reporters  are 
sent  to  the  Chief  of  the  Bureau  of  Crop  Estimates  by  mail  in 
sealed  envelopes. 

Preparation  of  Reports 

The  reports  received  by  the  department  from  the  different 
classes  of  individual  correspondents  are  tabulated  and  compiled 
and  the  figure  for  each  separate  State  computed.  After  the 
reports  from  the  different  counties  are  tabulated,  a  true  weighted 
figure  for  the  State  is  secured  by  taking  into  consideration  the 
relative  value  which  the  total  acreage  or  production  of  each 
county  in  the  State  bears  to  the  total  acreage  or  production  of  the 
State.  The  weight  figure  showing  the  value  of  the  county  is 
applied  to  the  acreage,  yield  per  acre,  or  condition,  whichever 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     I47 

it  may  be,  and  from  the  totals  of  the  weights  and  the  extensions 
a  weighted  average  for  the  State  is  ascertained.  The  averages  for 
speculative  crops  (com,  wheat,  oats,  and  cotton)  are  determined 
by  computers  who  do  not  know  the  particular  State  to  which 
their  figures  relate. 

The  work  of  making  the  final  crop  estimates  each  month 
culminates  at  sessions  of  the  crop  reporting  board,  composed  of 
five  members,  presided  over  by  the  statistician  and  chief  of 
bureau  as  chairman,  whose  services  are  brought  into  requisition 
each  crop-reporting  day  from  among  statisticians  and  officials  of 
the  bureau,  and  field  agents  and  crop  specialists  who  are  called  to 
Washington  for  the  purpose. 

The  personnel  of  the  board  is  changed  each  month.  The  meet- 
ings are  held  in  the  office  of  the  statistician,  which  is  kept  locked 
during  sessions,  no  one  being  allowed  to  enter  or  leave  the  room  or 
the  bureau,  and  all  telephones  being  disconnected. 

When  the  board  has  assembled,  reports  and  telegrams  regard- 
ing speculative  crops  from  field  agents  and  crop  specialists,  which 
have  been  placed  unopened  in  a  safe  in  the  office  of  the  Secretary 
of  Agriculture,  are  delivered  by  the  Secretary,  opened,  and 
tabulated;  and  the  figures,  by  States,  from  the  several  classes  of 
correspondents  and  agents  relating  to  all  crops  dealt  with  are 
tabulated  in  convenient  parallel  columns;  the  board  is  thus  pro- 
vided with  several  separate  estimates  covering  each  State  and 
each  separate  crop,  made  independently  by  the  respective  classes 
of  correspondents  and  agents  of  the  bureau,  each  reporting  for  a 
territory  or  geographical  unit  with  which  he  is  thoroughly 
familiar. 

Abstracts  of  the  weather  condition  reports  in  relation  to  the 
different  crops,  by  States,  are  also  prepared  from  the  weekly  bul- 
letins of  the  Weather  Bureau.  With  all  these  data  before  the 
board,  each  individual  member  computes  independently,  on  a 
separate  sheet  or  final  computation  slip,  his  own  estimate  of  the 
acreage,  condition,  or  yield  of  each  crop,  or  of  the  number,  con- 
dition, etc.,  of  farm  animals,  for  each  State  separately.  These 
results  are  then  compared  and  discussed  by  the  board  imder  the 
supervision  of  the  chairman,  and  the  final  figures  for  each  State 
are  decided  upon. 


148  BUSINESS  STATISTICS 

The  estimates  by  States  as  finally  determined  by  the  board  are 
weighted  by  acreage  or  other  figures  representing  the  relative 
importance  of  the  crop  in  the  respective  States,  the  result  for  the 
United  States  being  a  true  weighted  average  for  each  subject. 

Method  of  Issuing  Reports 

Reports  in  relation  to  cotton,  after  being  prepared  by  the  crop- 
reporting  board  and  personally  approved  by  the  Secretary  of 
Agriculture,  are  issued  on  or  about  the  first  day  of  each  month 
during  the  growing  season,  and  reports  relating  to  the  principal 
farm  crops  and  live  stock  about  the  seventh  or  eighth  day  of  each 
month.  In  order  that  the  information  contained  in  these  reports 
may  be  made  available  simultaneously  throughout  the  entire 
United  States,  they  are  handed,  at  an  announced  hour  on  report 
days,  to  all  applicants  and  to  the  Western  Union  Telegraph  Co. 
and  the  Postal  Telegraph-Cable  Co.,  which  have  branch  offices  in 
the  Department  of  Agriculture,  for  transmission  to  the  exchanges 
and  to  the  press.  These  companies  have  reserved  their  Hnes  at 
the  designated  time,  and  forward  immediately  the  figures  of  most 
interest.  A  multigraph  statement,  containing  such  estimates  of 
condition  or  actual  production,  together  with  the  corresponding 
estimates  of  former  years  for  comparative  purposes,  is  prepared 
and  mailed  immediately  to  newspaper  publications. 

The  crop  estimates  for  the  State  and  for  the  United  States  as  a 
whole  are  telegraphed  immediately  to  the  Weather  Bureau 
station  director  of  each  State,  in  whose  office  copies  are  printed 
and  mailed  to  all  the  local  papers  in  the  State,  so  that  the  crop 
estimates  of  the  bureau  are  published  throughout  the  United 
States  within  24  hours  of  their  issuance. 

Promptly  after  the  issuing  of  the  report,  it,  together  with  oth6r 
statistical  information  of  value  to  the  farmer  and  the  country  at 
large,  is  published  in  the  Agricultural  Outlook,  a  publication  of 
the  Bureau  of  Crop  Estimates,  under  the  authority  of  the  Secre- 
tary of  Agriculture.  An  edition  of  over  225,000  copies  is  dis- 
tributed to  the  correspondents  and  other  interested  parties 
throughout  the  United  States  each  month. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 49 

Acreage  Estimates 

For  many  years,  in  fact  since  the  bureau  was  organized  in  1862, 
it  has  been  the  practice  to  accept  the  estimates  of  acreage  planted 
to  different  crops  as  reported  by  the  Bureau  of  the  Census  every 
10  years.^  Then  in  the  first  year  following  the  census  the  crop 
reporters  of  this  bureau  would  estimate  the  acreage  planted  as  a 
percentage  of  the  acreage  reported  by  the  census  for  the  preceding 
year;  the  second  year  following  the  census  the  acreage  would  be 
estimated  as  a  percentage  of  the  acreage  estimated  the  preceding 
year,  and  so  on  until  figures  for  the  next  census  are  available. 
Theoretically,  if  there  is  no  bias  or  tendency  to  imderestimate  or 
overestimate  on  the  part  of  crop  reporters,  the  acreage  estimates 
by  this  method  for  the  tenth  year  after  a  census  would  agree  with 
the  acreage  reported  by  the  census  for  that  year.  A  weak  point 
in  the  system  which  has  long  been  recognized  is  the  fact  that  indi- 
vidual crop  reports  are  not  free  from  bias,  and  there  appears  to  be 
a  fairly  uniform  tendency  to  either  overestimate  or  underestimate 
the  acreage,  the  result  being  a  cumulative  error  which  in  10  years 
is  apt  to  result  in  a  wide  discrepancy  between  the  estimates  of  this 
bureau  and  the  figures  of  the  census.  To  illustrate,  if  the  Bureau 
of  the  Census  should  report  10,000,000  acres  planted  to  a  given 
crop,  and  there  should  be  a  imiform  tendency  on  the  part  of 
the  crop  reporters  of  this  bureau  to  imderestimate  the  acreage  of 
this  crop  an  average  of  2  per  cent  annually,  this  bureau  might 
estimate  the  acreage  as  9,800,000  acres  the  first  year  after  the  cen- 
sus, as  9,604,000  acres  the  second  year,  as  9,412,000  acres  the  third 
year,  and  so  on  until  the  tenth  year,  when  the  bureau^s  estimate 
for  the  crop  would  be  8,170,000.  If  during  the  lo-year  period 
there  had  actually  been  no  change  in  the  acreage  planted  to  the 
particular  crop  in  question,  and  the  census  should  again  report  an 
acreage  of  10,000,000,  the  result  would  be  a  manifest  discrepancy 
of  1,830,000  acres  between  the  figures  of  this  bureau  and  those  of 
the  census.  Further  discrepancies  would  appear  in  the  yield  per 
acre  and  the  total  yield. 

^  Prior  to  1880  the  census  did  not  show  acreages  of  crops  —  merely  production; 
hence  in  the  earlier  years  the  acreage  basis  was  obtained  by  dividing  the  census 
report  of  total  production  by  an  estimated  yield  per  acre. 


150  BUSINESS  STATISTICS 

At  or  near  the  close  of  harvest  each  year  agents  and  crop  re- 
porters of  the  bureau  estimate  the  yield  per  acre,  in  bushels, 
pounds,  or  tons,  according  to  the  nature  of  the  product.  The 
estimate  of  total  production  is  readily  obtained  by  multiplying 
the  yield  per  acre  thus  obtained  by  the  previously  estimated  total 
number  of  acres. 

It  will  be  observed  that  the  method  of  estimating  the  yield  per 
acre  differs  materially  from  the  method  of  estimating  the  total 
acreage,  the  acreage  estimate  being  based  upon  a  percentage  of 
the  preceding  year's  acreage,  thus  carrying  on  from  year  to  year 
any  error  made  in  any  previous  year;  whereas  the  yield-per-acre 
estimate,  being  based  upon  the  one  year  and  not  referring  to  any 
former  year,  is  not  affected  by  any  error  of  a  previous  year.  A 
constant  yearly  underestimate  of,  say,  2  per  cent  in  the  acreage 
will  be  magnified  to  a  difference  of  about  10  per  cent  in  5  years 
and  20  per  cent  (approximately)  in  10  years.  A  constant  yearly 
underestimate  of  2  per  cent  in  the  yield  per  acre  will  not  be 
magnified  in  5  or  10  years,  but,  on  the  other  hand,  in  comparing 
one  year's  estimated  yield  with  another  the  errors  will  be  neutral- 
ized; that  is,  the  effect  would  be  the  same,  so  far  as  comparative 
value  is  concerned,  as  though  no  error  had  occurred.  In  short, 
biased  errors  in  acreage  estimates  by  percentage  grow  from  year 
to  year;  biased  errors  in  yield-per-acre  estimates  neutralize  each 
other. 

The  Bureau  of  the  Census  enumerates  total  acres  and  total  pro- 
duction of  crops;  if  yield  per  acre  is  wanted  it  is  obtained  by 
dividing  the  production  by  the  acres.  The  Bureau  of  Crop  Esti- 
mates obtains  directly  from  its  agents  and  correspondents  esti- 
mates of  acreage  (as  described)  and  yield  per  acre  and  arrives  at 
the  total  production  by  multiplying  acreage  by  yield  per  acre. 

Notwithstanding  the  difference  in  methods  of  procedure,  the 
estimates  of  yield  per  acre  obtained  by  the  Bureau  of  Crop  Esti- 
mates in  census  years  and  the  figures  of  yield  per  acre  obtained  by 
the  census,  with  few  exceptions,  do  not  vary  widely. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     I51 

Live-Stock  Estimates 

Practically  the  same  difficulty  is  encountered  by  this  bureau  in 
its  estimates  of  the  numbers  of  different  classes  of  live  stock,  i.  e., 
the  probable  cumulative  error  resulting  from  a  uniform  tendency 
to  either  underestimate  or  overestimate  and  the  consequent  appli- 
cation of  an  erroneous  percentage  to  the  census  figure  the  first 
year  and  to  an  erroneous  basis  in  each  succeeding  year  imtil  the 
next  census.  A  further  cause  of  divergence  between  the  live- 
stock estimates  of  this  bureau  and  the  figures  of  the  census,  and 
between  any  two  census  years,  results  from  taking  the  census  or 
making  the  estimates  at  different  seasons  of  the  year.  It  can 
readily  be  seen  that  in  the  case  of  sheep  and  swine  the  estimates 
cannot  agree  imless  made  as  of  the  same  date,  because  of  the 
normally  wide  fluctuations  in  numbers  due  to  natural  increase 
during  a  few  months  in  spring  and  the  large  decrease  due  to 
slaughter  in  the  case  of  swine,  and  also  from  exposure  and  other 
causes  in  the  case  of  sheep  during  the  winter  months. 

While  the  Bureau  of  Crop  Estimates  has  in  recent  years  taken 
cognizance  of  the  tendency  to  bias  on  the  part  of  its  field  force  and 
has  endeavored  to  make  such  allowance  therefore  as  would  correct 
the  errors  involved,  besides  checking  its  estimates  against  the 
returns  of  tax  assessors  in  different  States  and  such  other  reliable 
sources  of  information  as  are  available,  it  has  felt  the  need  for  a 
better  method  of  estimating  acreages  and  live  stock  between  the 
census  years. 

Use  of  Rural  Mail  Carriers 

As  an  experiment,  and  with  the  cooperation  of  the  Post  Office 
Department,  an  attempt  was  made  in  the  winter  months  of  1913- 
14  to  secure  accurate  data  as  to  acreage  planted  and  numbers  of 
live  stock  in  the  State  of  Maryland  and  15  counties  in  South 
Carolina  by  means  of  short,  simple  schedules  left  in  mail  boxes 
and  collected  by  the  rural  mail  carriers.  In  theory  this  plan 
should  result  in  complete  returns  as  accurate  as  a  census,  but  in 
practice  it  was  found  that  less  than  40  per  cent  of  the  farmers 
would  fill  out  the  schedules.  The  experiment  demonstrated  that 
satisfactory  results  by  this  method  cannot  be  secured  without 


152  BUSINESS  STATISTICS 

(i)  a  personal  canvass  and  actual  enumeration  by  the  rural  mail 
carriers  similar  to  that  of  the  census  enumerators;  (2)  legislation 
making  it  compulsory  upon  farmers  to  supply  the  information 
requested;  or  (3)  a  long  campaign  through  the  press  and  other 
agencies  to  educate  the  farmer  into  the  idea  of  furnishing  infor- 
mation of  a  statistical  nature  regarding  their  business,  primarily 
for  their  own  benefit  and  incidentally  for  the  benefit  of  others. 

Typical  Farms  for  Estimating  Acreage  and  Live  Stock 

The  experiment  in  utilizing  the  services  of  rural  mail  carriers 
for  making  an  actual  enumeration  of  acreages  and  of  live  stock 
having  proved  inadequate  and  unsatisfactory,  even  as  a  basis  for 
estimating,  it  was  decided  to  establish  a  selected  list  of  typical 
farmers  in  each  county  in  the  United  States  who  will  agree  in 
advance  to  cooperate  with  the  department  to  the  extent  of  fur- 
nishing accurate  statements  of  acreages  and  live  stock  on  their 
farms  for  a  series  of  years.  These  reports  will  establish  a  basis  for 
comparison  with  the  census  figures  and  will  enable  the  depart- 
ment to  estimate  with  a  high  degree  of  accuracy  the  changes 
which  take  place  annually  between  censuses.  In  future  years  it 
will  be  a  simple  matter  to  apply  the  rate  of  increase  or  decrease  in 
acreages  and  live  stock  which  is  found  to  take  place  on  the 
selected  typical  farms  in  each  county  to  the  total  number  of  farms 
reported  by  the  Bureau  of  the  Census,  and  the  results  can  be 
used  to  check  the  estimates  prepared  on  the  percentage  basis 
under  the  present  system.  A  much  higher  degree  of  accuracy 
will  also  be  possible  with  census  returns  available  every  5  years, 
as  will  be  the  case  hereafter,  instead  of  only  once  in  10  years  as 
heretofore. 

The  "  Normal  ^'  as  a  Basis  of  Condition  Reports 

Special  consideration  has  been  given  for  many  years  to  the 
so-called  "  normal,"  representing  a  condition  or  yield  of  100  per 
cent,  in  terms  of  which  all  the  crop  condition  estimates  of  this 
bureau  are  expressed.  An  objection  to  the  use  of  this  term  and 
what  it  represents,  as  a  basis  for  crop  reporting,  arises  from  its 
apparent  vagueness  and  the  fact  that  the  yield  represented  by  it 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 53 

is  different  for  each  locality  and  even  for  each  farm,  thus  requiring 
explanation  in  order  to  be  understood.  The  principal  advantage 
of  the  term  "  normal  "  is  psychological  in  that  it  is  based  on  a 
fundamental  conception  which  is  fairly  uniform  and  clear  in  the 
minds  of  all  practical  farmers,  from  whom  over  99  per  cent  of  the 
crop  condition  reports  of  this  bureau  are  received. 

But  little  observation  and  experience  is  required  ^to  demon- 
strate that  the  average  farmer  thinks  of  his  crop  as  "  crops  "  and 
not  in  mathematical  terms  of  percentages  or  averages,  although 
he  can  readily  express  the  estimated  yield  of  the  crop  in  terms  of 
bushels,  pounds,  or  tons.  When  the  farmer  sows  the  seed  in 
spring  he  knows  just  what  the  field  ought  to  yield,  and  if  the 
season  is  favorable  he  expects  to  harvest  that  yield.  This  expected 
yield  is  a  "  full  crop,"  such  as  he  has  harvested  in  the  past  in 
favorable  seasons.  It  is  neither  a  maximum  possible  or  even  a 
bumper  crop,  which  occurs  only  at  rare  intervals  when  conditions 
are  exceedingly  favorable,  nor  a  medium  or  small  crop  grown 
under  one  or  more  adverse  conditions.  Neither  is  it  an  average 
crop,  which  rarely  occurs  because  of  the  effect  on  the  average  of 
extremely  low  or  extremely  high  yields  in  exceptional  seasons. 
It  is  rather  the  typical  crop  represented  by  the  average  of  a  series 
of  good  crops,  leaving  out  of  consideration  altogether  the  occa- 
sional bumper  crop  and  the  more  or  less  frequent  partial  crop 
failure.  This  expected  yield  at  planting  time,  the  full  crop  that 
the  farmer  has  in  mind  when  he  thinks  of  the  yield  he  expects  to 
harvest,  or  the  typical  crop  represented  by  the  average  of  good 
crops  only,  is  the  "  normal,"  or  standard  adopted  by  this  bureau 
for  expressing  condition  during  the  growing  season  and  yield  at 
harvest  time. 

The  observation  is  sometimes  made,  as  a  criticism  of  the  use  of 
the  normal,  that  a  normal  crop  is  almost  never  shown  in  the 
reports  of  the  bureau.  A  Httle  reflection  will  show  that  a  normal 
yield  for  an  entire  State  or  the  United  States  is  not  to  be  expected 
except  on  rare  occasions.  Imagine  the  yields  of  10  different 
farmers  in  widely  scattered  parts  of  the  United  States;  by  defini- 
tion of  the  term  normal  as  a  "  full  crop,"  or  expectation  of  yield 
at  planting  time,  an  individual  will  not  secure  a  normal  yield 


154  BUSINESS  STATISTICS 

every  year,  or  even  every  two  years.  Suppose  each  individual 
secured  a  normal  crop  on  the  average  every  three  years,  by  the  law 
of  probability  the  chance  of  all  lo  farmers  getting  a  normal  crop 
in  the  same  year  is  i  to  30.  If  returns  of  individuals  were  pub- 
lished, many  normals  would  be  shown,  but  the  frequency  would 
be  less  in  a  county  average,  still  less  in  a  State  average,  and  rare 
in  a  United  States  average. 

The  crop  prospect  is  a  subject  of  vital  interest  to  farmers  and, 
like  the  weather,  it  is  a  perennial  topic  of  discussion  during  the 
crop  season.  Almost  invariably  farmers  speak  of  the  prospects 
as  fine,  good,  fair,  or  poor,  and  they  describe  the  crop  as  "  full 
crop,"  "  good  crop,"  "  average  crop  "  (meaning  less  than  a  full 
crop  but  a  little  better  than  the  real  average),  "  three-fourths  of 
a  crop,"  or  "  one-half  of  a  crop,"  or  less  frequently  "  75  per  cent 
of  a  crop,"  "  50  per  cent  of  a  crop,"  etc.  In  the  South  the  cotton 
crop  prospect  is  usually  spoken  of  in  terms  of  bales,  as  "  three- 
fourths  bale  per  acre,"  "  one-half  bale  per  acre,"  or  "  one- third 
bale  per  acre."  Few  farmers  think  of  their  crops  in  terms  of 
exact  mathematical  averages  or,  in  fact,  know  what  the  exact 
average  really  is,  because  very  few  of  them  keep  accurate  records 
or  take  the  trouble  to  strike  averages  from  them.  It  is  equally 
true  that  farmers  do  not  generally  speak  of  crop  conditions  and 
crop  prospects  in  terms  of  a  normal,  but  when  the  farmer  crop 
reporters  are  told  that  the  normal  is  the  same  as  their  conception 
of  a  full  crop,  the  crop  which  their  farms  ought  to  yield  and  are 
expected  to  yield  in  favorable  seasons,  and  that  this  normal  is 
represented  by  100,  they  have  no  difficulty  in  clearly  under- 
standing what  is  meant  by  the  normal  or  in  expressing  their 
estimates  in  percentages  of  normal. 

Reports  of  crop  condition  expressed  in  percentage  of  normal 
may  indicate  in  a  general  way  the  probable  yield,  but  as  they  do 
not  include  the  variations  in  acreage  it  would  be  impracticable  to 
forecast  total  production  accurately  from  condition  estimates 
alone.  Hence,  to  avoid  errors  in  the  interpretation  of  condition 
estimates  by  those  who  do  not  have  the  average  figures  before 
them,  the  bureau  converts  the  condition  estimates  into  quantita- 
tive estimates  of  yield  per  acre,  which,  applied  to  the  estimated 
acreage  of  a  given  crop,  indicate  the  probable  total  production. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 55 

The  question  is  frequently  asked  why  the  crop  estimates  are  not 
(i)  based  on  the  average  crop  (presumably  the  average  for  the 
past  5,  10,  or  20  years),  or  (2)  on  the  crop  of  the  preceding  year, 
or  (3)  simply  estimated  for  the  present  year  in  terms  of  bushels, 
pounds,  or  tons. 

The  answer  to  the  first  proposition  is  that  no  "  average  crop  " 
can  properly  be  said  to  exist,  or  rather  it  would  not  correspond  to 
any  crop  actually  harvested,  because  the  average  for  any  given 
period  is  unduly  influenced  by  the  exceptionally  low  or  high 
yields  of  abnormal  seasons.  In  other  words,  the  average  is  a 
fluctuating  instead  of  a  fixed  standard.  Furthermore,  it  would  be 
exceedingly  difficult  to  obtain  satisfactory  estimates  of  crop 
prospects  based  on  average  yields  from  farmer  crop  reporters, 
who  constitute  the  bulk  of  the  bureau's  field  force  in  reporting  on 
crop  conditions  during  the  growing  season.  Farmers  as  a  rule  do 
not  keep  a  record  of  average  yields  on  their  farms  or  for  their 
communities.  They  do,  of  course,  remember  abnormally  high  or 
low  yields,  but  they  invariably  leave  such  yields  out  of  considera- 
tion when  estimating  crop  prospects.  If  the  average  crop,  say,  for 
a  period  covering  the  last  five  years,  were  adopted  as  the  stand- 
ard, it  would  be  necessary  for  the  bureau  to  estimate  the  average 
condition  for  each  month  of  the  growing  season,  and  the  aver- 
age yield  for  each  year  in  each  county  and  township  in  the  United 
States  (over  30,000)  for  each  of  the  crops  included  in  the  estimates 
(50  or  more),  and  to  furnish  each  crop  reporter  with  the  aver- 
age production  of  each  crop  in  his  territory  for  use  in  making 
up  his  monthly  estimates  during  the  year.  This  would  entail  an 
enormous  amount  of  additional  work,  and  the  average  would  be 
unsatisfactory  because  the  smaller  the  unit  of  territory  the 
greater  would  be  the  fluctuation  in  the  average  or  standard 
caused  by  crop  failures  or  occasional  bumper  yields.  A  single 
illustration  will  suffice  to  make  this  point  clear.  Taking  the  com 
crop  of  Kansas  as  an  example,  the  average  yield  of  com  per  acre 
in  the  State  of  Kansas  for  each  of  10  years,  beginning  with  1903, 
was  as  follows:  20.9,  27.7,  28.9,  22.1,  22,  19.9,  19,  14.5,  23,  3.2. 
The  average  for  the  10  years  is  20.1  bushels;  the  average  for  the 
last  5  years  is  15.9  bushels;  for  the  preceding  5  years  24.3  bushels. 


156  BUSINESS  STATISTICS 

On  the  other  hand,  the  idea  of  a  normal  crop,  or  a  full  crop,  was 
nearly  constant,  being  31.7  for  the  last  5  years,  31.5  for  the 
preceding  5  years,  and  31.6  for  the  10  years. 

The  answer  to  the  second  proposition,  namely,  a  comparison  of 
this  year's  crop  with  the  crop  of  the  preceding  year,  is  that  while 
farmers  remember  fairly  well  the  condition  and  yield  of  crops  for 
the  past  year,  they  do  not  remember  them  with  sufficient  clear- 
ness or  accuracy  to  be  able  to  use  them  as  a  standard  of  compari- 
son for  this  year.  Furthermore,  the  crops  of  last  year  may  have 
been  abnormally  high  or  low,  and  would  therefore  make  a  very 
poor  basis  of  comparison.  For  instance,  the  yield  of  corn  per  acre 
in  Kansas  was  23  bushels  in  191 2,  or  159  per  cent  of  the  yield  per 
acre  in  191 1  (14.5  bushels).  The  yield  in  1913,  an  abnormally 
dry  season,  was  only  3.2  bushels  per  acre,  which  was  14  per  cent 
of  the  yield  in  191 2.  If  the  yield  per  acre  of  com  in  Kansas  for 
1914  should  be  21  bushels  per  acre,  it  would  be  656  per  cent  of  the 
yield  of  1913.  It  is  apparent,  therefore,  that  the  abnormally 
low  yield  of  191 3  is  a  most  unsatisfactory  basis  of  comparison 
for  the  year  1914. 

The  third  proposition,  namely,  the  estimating  of  crops  directly 
in  terms  of  bushels,  pounds,  or  tons,  is  sometimes  advanced.  The 
objection  to  this  system  is  the  difficulty  that  most  people  experi- 
ence in  estimating  accurately,  until  near  harvest,  the  number  of 
bushels  or  pounds  which  an  acre  will  yield,  even  though  they  may 
be  good  judges  and  have  the  field  before  them.  Experience  has 
demonstrated  repeatedly  that  it  is  much  easier  to  estimate  pro- 
portions and  differences  in  comparing  one  period  with  another,  or 
the  production  of  one  year  with  the  production  of  another  year, 
or  condition  and  prospective  yield  with  some  standard,  such  as  a 
normal,  than  it  is  to  estimate  quantitatively  what  the  condition 
or  yield  for  a  given  area  actually  is  at  any  given  time.  Anyone 
can  demonstrate  this  principle  to  his  own  satisfaction  while  look- 
ing at  a  shelf  partly  filled  with  books  or  a  glass  jar  partly  filled 
with  beans.  The  shelf  or  jar  becomes  in  each  case  the  standard 
or  normal  represented  by  100  per  cent.  He  will  probably  find 
that  he  can  readily  estimate  that  the  shelf  or  jar  is  three-fourths 
or  75  per  cent  full,  and  while  he  may  be  able  to  guess  within  25 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 57 

per  cent  of  the  actual  number  of  books,  he  may  overestimate  the 
actual  number  of  beans  in  the  jar  more  than  100  per  cent.  So 
with  cereals  or  other  crops.  It  is  relatively  easy  for  the  crop 
reporter  to  estimate  the  prospects  as  90  per  cent  of  the  normal  or 
other  standard,  but  he  may  have  dilBSiculty  in  estimating  within 
25  per  cent  of  the  actual  prospects  in  terms  of  bushels.  Of  course, 
crop  estimates  stated  simply  as  percentages  of  a  normal  or  other 
standard  would  not  mean  much,  for  which  reason,  wherever  prac- 
ticable, such  estimates  are  converted  into  numerical  statements 
by  the  bureau  and  their  equivalents  in  bushels,  pounds,  or  tons 
are  published  in  comparative  statements  showing  the  figures  for 
the  previous  year  and  the  5  or  10  year  average. 

This  whole  subject  of  standards  or  bases  for  crop  reports  has 
been  thoroughly  and  repeatedly  considered,  both  in  this  coimtry 
and  abroad.  On  every  occasion  when  the  subject  has  been  con- 
sidered in  this  bureau  the  normal  has  seemed  to  possess  more 
advantages  and  fewer  disadvantages  than  any  other  standard. 
The  Canadian  Government  has  adopted  as  its  basis  of  crop  esti- 
mates the  principle  of  the  lo-year  average.  The  lo-year  average 
has  also  been  adopted  by  the  International  Institute  of  Agricul- 
ture at  Rome,  and  the  Institute  is  constantly  urging  its  adoption 
by  the  adhering  countries.  Great  Britain  still  uses  the  lo-year 
average  as  the  standard,  which  is  fluctuating.  Germany  and  a 
few  other  European  countries  use  the  numbers  i  to  5,  inclusive,  to 
represent  the  condition  of  excellent,  good,  fair,  poor,  or  very  poor. 
In  France  the  same  gradations  of  conditions  are  symbolized  by 
80  to  100,  60  to  80,  40  to  60,  20  to  40,  and  i  to  20.  The  German 
system  results  in  confusion  because  in  Germany  the  number  i 
represents  the  highest  condition,  while  in  Sweden  it  represents 
the  lowest  condition;  besides,  the  terms  excellent,  good,  fair,  or 
poor  are  only  descriptive  and  are  open  to  interpretations  which 
interested  speculators  may  desire  to  place  upon  them. 

Accuracy  of  Condition  Reports 

The  quantitative  interpretation  by  the  Department  of  Agri- 
culture of  condition  reports  of  principal  crops,  except  cotton,  was 
begun  in  191 1.    A  review  of  these  interpretations,  or  forecasts, 


IS8 


BUSINESS  STATISTICS 


shows  that  those  made  in  June  varied  an  average  of  11.2  per  cent 
from  final  yield  estimates;  those  in  July  varied  9.6  per  cent;  in 
August  6.7  per  cent;  in  September  4.3  per  cent;  in  October  3.1 
per  cent.  Generally  forecasts  made  one  and  two  months  before 
the  harvest  inquiry  are  very  close  to  the  final  estimates  of  yield. 
The  above  percentages  do  not  reflect  the  accuracy  of  the  work  of 
estimating,  but  rather  reflect  the  variableness  of  conditions 
affecting  growing  crops,  which  is  shown  by  changes  which  take 
place  after  the  dates  to  which  the  condition  reports  relate.  The 
condition  of  a  com  crop  on  August  i  may  be  normal  with  a  fore- 
cast of  35  bushels  per  acre;  but  the  crop  may  be  practically 
ruined  10  days  later  by  a  devastating  hot  wind,  and  the  final  yield 
be  but  2  or  3  bushels  per  acre.  The  forecasts  are  such  figures  that, 
based  upon  average  conditions  in  past  years,  there  is  an  even 
chance  or  probability  that  the  final  yield  will  be  either  above  or 
below  the  figure  forecast.  A  variation  of  11.2  per  cent  from  the 
June  forecast  does  not  necessarily  indicate  an  error  of  11.2  per 
cent  in  the  forecast,  but  rather  indicates  an  average  subsequent 
change  in  condition  of  11.2  per  cent  before  harvest. 

The  forecasts  made  during  the  past  three  years,  and  final 
estimates  of  yield,  are  given  below:  — 


Forecast  made 

in  — 

June 

July 

August 

September 

October 

25.5 

22.6 

23.6 

23.8 

26.0 

26.0 

27.7 

27.9 

.... 

27.8 

25.0 

22.0 

22.2 

15.3 

14.6 

.... 

.... 

14.I 

13-9 







15-9 

1S.6 





13.7 

11.8 

10. 1 

9.8 

.... 

13.8 

14. 1 

I5-I 

15.6 

13-5 

II. 7 

12.5 

13.0 

Final 
estimate 


Com  (bushels): 

1911 

1912 

1913 • 

Winter  wheat  (bushels) ; 

1911 

1912 

1913 

Spring  wheat  (bushels)  : 

1911 

1912 

1913 


23-9 
29.2 
23.1 

14.8 

16.S 

9.4 

17.2 
13.0 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 59 


Forecast  made  in  — 


June 


July 


August       September     October 


Final 
estimate 


All  wheat  (bushels) : 

1911 

1912 

1913 

Oats  (bushels) : 

1911 

1912 

1913 

Barley  (bushels) : 

1911 

1912 

1913. 

Rye  (bushels): 

1911 

1912 

1913 

Flaxseed  (bushels): 

1911 

1912 

1913 

Rice  (bushels): 

1911 

1912 

1913 

Potatoes  (bushels) : 

1911 

1912 

1913 

Tobacco  (pounds): 

1911 

1912 

1913 

Hay  (tons): 

1911 

1912 

1913 

Buckwheat  (bushels): 

1911 

1912 

1913 


14.7 
14.0 
15.0 

27.7 

29-3 
28.8 

24.9 
25.2 
24.4 

16.1 
16.0 
16.5 


13-5 
14.0 
14. 1 

23.2 
30.1 
26.9 

20.9 
25.6 
22.8 

15-5 
16.0 
16.1 

8.6 
9.4 

8.7 

32.2 
31-7 
33 -o 

81.7 
95.5 
93-1 

698.1 
844.9 
809.0 

10.8 
1.40 
1-33 


12.8 
15.0 

23.2 

31-9 
26.8 

19.8 
26.7 
23.1 


7.6 
9.4 

8.3 

32.7 
31.9 
33.1 

71-5 

100.7 

92.0 

672.4 
820.6 
783.0 

1. 14 
1.49 
1.33 

18.1 

19-3 
20.1 


12.6 
15.4 
15.2 

23-9 
34-1 
27.8 

20.3 
27.6 
23.2 


7-7 
9.7 
8.4 

32.1 

32.7 
32.8 

74.2 

108.0 

88.1 

714.6 
817.1 
752-4 


8.1 
9.8 
8.7 

32.0 
33.4 
30.9 

79-7 

108.8 

86.7 

801. 1 
816.0 
766.0 


19.6 
21.3 
18.2 


19.6 
21.4 
16.5 


12.5 
15.9 
15-2 

24.4 

37.4 
29.2 

21.0 
29.7 
23.8 

1S.6 
16.8 
16.2 

7.0 
9.8 
7.8 

32.9 
34.7 
3I-I 

80.9 

113-4 
90.4 

893-7 

785.5 
784.3 

1.14 
1.47 
1.31 

21. 1 
22.9 
17.2 


i6o 


BUSINESS  STATISTICS 


The  preliminary  estimates  of  the  cotton  crop  in  December  each 
year  are  checked  against  the  monthly  and  annual  reports  of  pro- 
duction by  the  Bureau  of  the  Census.  The  census  reports,  which 
are  presumed  to  be  the  most  accurate  obtainable,  indicate  that  the 
Bureau  of  Crop  Estimates  has  overestimated  the  cotton  crop  6 
times  and  underestimated  the  crop  8  times  in  the  past  14  years. 

The  following  tabulation  gives  the  annual  estimates  of  the  De- 
partment of  Agriculture  of  the  production  of  cotton,  expressed  in 
pounds  of  lint,  the  quantity  as  finally  reported  by  the  Bureau  of 
the  Census,  and  the  percentage  of  overestimate  or  underestimate 
by  the  Department  of  Agriculture:  — 

Number  of  Pounds  of  Lint  Cotton  (net  weight)  as  Estimated  in  December, 
annually,  by  the  department  of  agriculture,  and  as  subsequently 
Reported  by  the  Bureau  of  the  Census,  for  each  of  the  Seasons 
1900-01  TO  1913-14,  inclusive,  together  with  the  Percentage  Over- 
estimated OR  Underestimated  by  the  Department  of  Agriculture 
each  Season. 


Crop  year 


Pounds  of  cotton  (coo  omitted) 


Estimated  by 

Department  of 

Agriculture 


Finally  re- 
ported by  Cen- 
sus Bureau 


Over- 
estimated 


Under- 
estimated 


1900-1901 

1901-2 

1902-3 

1903-4 

1904-S • 

1905-6 

1906-7 

1907-8 

1908-9 

1909-10 , .  . . 

1910-11 

1911-12 

1912-13 

1913-14...; 

Total  1900-19 14.  . 

Years  of  overestimate, . 
Years  of  underestimate 


4,856,738 
4,529,954 
5,111,870 
4,889,796 
6,157,064 
4,860,217 
6,001,726 
5,581,968 
6,182,970 
4,826,344 

5,464,597 
7,121,713 
6,612,335 
6,542,850 


78,740,142 


31,879,051 
46,861,091 


4,846,471 
4,550,950 
5,091,641 
4,716,591 
6,426,698 
5,060,200 
6,354,110 
5,312,950 
6,336,070 
4,783,220 
5,551,790 
7,506,430 
6,556,500 
6,772,350 


79,865,971 


31,307,373 
48,558,598 


Per  cent 
0,2 


.4 
3.7 


5.1 
.9 


1.8 


Per  cent 
0.5 


4.2 
4.0 
5.5 

2,4 

1.6 
5.1 

3-4 


1,4 


3-5 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     l6l 

As  shown  in  the  tabulation  above,  during  the  past  14  years  the 
Department  of  Agriculture  has  overestimated  the  crop  six  times 
and  underestimated  it  eight  times.  In  years  of  overestimates  the 
average  error  was  1.8  per  cent;  in  those  of  underestimates  the 
average  error  was  3.5  per  cent;  for  the  entire  14  years  the  average 
error  was  2.8  per  cent.  Balancing  the  overestimates  and  imder- 
estimates  shows,  for  the  entire  period,  a  net  underestimate  of 
only  1.4  per  cent. 

IV.  Current  Sources  of  Information  in  Produce 
Markets  ^ 
By  Bruce  D.  Mudgett 

Current  information  ^  dealing  with  the  cotton  market  may  be 
divided  into  two  classes,  based  on  the  point  of  origin  of  the  data, 
viz.,  (i)  information  concerning  production,  acreage  and  con- 
dition; and  (2)  statistics  of  current  prices.  The  one  must  ema- 
nate necessarily  from  the  area  of  production;  for  the  other  the 
only  source  is  the  exchanges.  Cotton,  like  wheat,  is  peculiar  in 
this  respect  that  there  has  developed  a  most  extensive  system  of 
trading  in  futures,  and  the  middlemen  on  whose  shoulders  falls 
the  risk  of  this  system  find  it  an  economic  necessity  to  discount 
pending  conditions  of  supply  and  demand  so  as  to  shape  their 
affairs  to  conform  with  a  season's  average  condition.  Mr.  Henry 
G.  Hester,  secretary  of  the  New  Orleans  Cotton  Exchange, 
famous  for  his  cotton  reports,  speaking  of  the  need  of  these  reports 
and  the  amount  of  dependence  that  can  be  placed  upon  them, 
says:  "  Reports  of  this  kind  are  valuable  as  indications  of  the 
trend  of  supply  and  demand,  and  their  contents  exert  more  or  less 
influence  as  statements  of  facts  bearing  upon  the  basic  causes  of 
price  fluctuations.  All  other  matters,  such  as  wars  and  rumors 
of  wars,  panics,  dear  and  cheap  money,  etc.,  etc.,  by  reason  of 

*  The  Annals  of  the  American  Academy  of  Political  and  Social  Science,  vol. 
XXXVIII,  No.  2,  pp.  104-125.  Reprinted  by  permission  of  The  Annals  of  the 
American  Academy  of  Political  and  Social  Science. 

2  Only  the  most  important  sources  of  market  news  could  be  enumerated  for  each 
of  the  leading  markets,  and  where  criticisms  have  been  ofifered,  they  have  in  nearly 
every  case  been  given  to  represent  the  judgments  of  brokers  and  dealers,  directly 
interested  in  the  market,  as  obtained  by  personal  interview  or  correspondence. 


1 62  BUSINESS  STATISTICS 

their  bearing  upon  either  the  volume  of  supplies  or  the  extent  of 
demand  for  an  article  are  collateral.  Upon  reliable  statements  of 
facts  the  world  bases  its  opinions;  these  coupled  with  collateral 
conditions  are  the  sources  of  deductions  or  forecasts  of  the  possible 
or  probable  course  of  future  values.  To  the  extent  of  the  relia- 
bility of  statements  of  facts,  or  perhaps  it  would  be  more  correct 
to  say  the  amount  of  confidence  reposed  in  such  statements, 
is  the  price  of  an  article  more  or  less  governed.  The  fear  of  the 
effect  of  any  cause  upon  the  possible  supply  or  possible  demand  is 
proven  to  be  more  or  less  grounded  by  the  actual  facts  as  they 
occur,  and  while  such  fears  may  exert  a  temporary  influence  on 
values,  the  permanency  of  such  influence  is  determined  only 
through  information  concerning  actualities." 

The  extensive  area  over  which  cotton  is  grown  is  the  explana- 
tion of  the  large  and  complicated  organizations  which  are  engaged 
in  reporting  on  production,  condition  and  acreage  of  cotton. 
Greatest  of  all  among  these  organizations  is  the  United  States 
Government.  That  the  government  crop  reports  have  been  sub- 
jected to  just  criticism  in  the  past  is  undoubted.  It  is  just  as  true 
that  the  cause  of  that  criticism  has  been  removed,  and  that  the 
greatest  degree  of  care  is  used  in  compiling  and  issuing  the  reports 
so  as  not  to  permit  them  to  become  prematurely  available  to 
unscrupulous  manipulators.  Nevertheless  there  are  today  still  a 
great  many  brokers  who  maintain  that  all  persons  legitimately 
concerned  in  the  distribution  of  the  cotton  crop  would  be  better 
off  if  there  were  no  crop  reports  issued.  A  favorite  criticism 
leveled  at  the  reports  is  that  they  are,  and  in  their  nature  can  be, 
nothing  more  than  a  guess  by  a  government  board;  that  both 
weather  and  acreage  reports  are  used  by  manipulators  and 
plungers  to  influence  prices,  thereby  causing  more  and  greater 
price  fluctuations,  and  producing  the  very  thing  they  were 
intended  to  prevent.  Some  brokers  go  to  the  extent  of  saying 
that  the  trade  as  a  whole  would  be  better  off  were  no  reports  of 
any  kind  ever  published.  Upon  analysis  the  situation  appears  to 
be  a  struggle  between  the  interests  most  concerned  in  the  "  spot  " 
markets  and  those  interested  in  the  "  future  "  markets.  The 
merchant  dealing  in  the  spot  market  is  interested  in  his  com- 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 65 

mission  and  therefore  is  interested  in  as  high  a  price  for  the  prod- 
uct as  he  can  get.  In  this  he  is  supported  by  the  producer. 
The  dealer  in  the  future  market  is  the  one  who  makes  possible 
hedging  operations  on  the  part  of  manufacturers  and  the  latter 
are  interested  in  getting  cotton  at  rock  bottom  prices.  Between 
these  two  range  the  speculator  and  the  manipulator  ready  to 
take  advantage  of  a  change  of  price  in  either  direction.  It  is 
probable  that  the  time  will  never  come  when  all  of  such  diverse 
interests  can  be  wholly  satisfied.  In  the  meantime  the  govern- 
ment crop  reports  will  continue  to  be  published  and  their  publica- 
tion will  have  the  loyal  support  of  at  least  a  large  and  influential 
minority  of  those  interested. 

The  government  reports  are  of  three  kinds:  (i)  the  Weather 
Bureau  reports;  (2)  reports  of  the  Census  Bureau  on  acreage 
and  on  cotton  ginned;  and  (3)  reports  of  the  Department  of 
Agriculture  published  in  the  Crop  Reporter.  The  Weather 
Bureau  reports  are  issued  weekly  and,  as  the  name  indicates, 
afford  an  opportunity  of  getting  a  line  on  weather  conditions  in 
the  regions  of  the  growing  crop.  The  Census  Bureau  compiles 
reports  of  cotton  ginned  from  statements  received  by  it  from  the 
gins  in  active  operation. 

An  unusual  example  of  the  accuracy  with  which  these  ginning 
reports  measure  the  cotton  crop  was  given  last  year  (crop  year  of 
1909-10).  The  Census  Bureau  had  reported  10,386,000  bales 
of  cotton  ginned  for  the  year.  When  Secretary  Hester's  report  on 
the  crop  appeared  in  September  it  gave  the  actual  growth  for 
1909-10  as  10,389,000  bales,  a  difference  of  only  3,000  bales. 
Needless  to  say  that,  while  they  usually  correspond  closely,  they 
do  not  often  produce  a  result  like  the  above.  The  reports  of 
cotton  ginned  also  give  the  bureau  an  opportunity  to  get  a  line 
on  the  acreage. 

Every  five  years  a  census  is  taken  of  the  acreage.  This  acre- 
age estimate  is  available  to,  and  is  used  by,  the  Department  of 
Agriculture.  The  first  Census  Bureau  report,  issued  in  June, 
gives  estimated  acreage  as  of  May  25  th.  Thereafter,  twice 
monthly,  the  bureau  reports  on  the  amount  ginned.  In  March 
the  total  quantity  ginned  is  reported.    The  Department  of  Agri- 


164  BUSINESS  STATISTICS 

culture  through  the  crop  reporting  board  makes  six  reports 
yearly  on  cotton.  The  first,  issued  on  June  2d,  reports  the  acre- 
age and  condition  of  the  crop  on  May  25  th,  by  states.  There- 
after, in  July,  August,  September  and  October,  the  condition  of 
cotton  is  reported  for  the  twenty-fifth  of  the  month  previous. 
The  last  report,  issued  about  December  loth,  pubhshes  the  esti- 
mate of  the  total  production  of  cotton  by  states  for  the  year. 

Private  reports  on  cotton  fall  heir  to  much  the  same  criticism 
that  is  directed  against  the  government  reports.  Among  the  total 
nimiber  will  be  found  many  which  are  little  more  than  guesswork, 
and  in  which  no  credence  can  be  placed.  But,  on  the  other  hand, 
some  of  the  private  reports  are  prepared  with  the  utmost  care  that 
large  and  costly  organizations  can  give  and  deserve  the  confidence 
reposed  in  them. 

A  great  many  trade  newspapers  collect  their  own  cotton  statis- 
tics. Among  these  the  reports  of  the  New  York  Journal  of  Com- 
merce are  probably  most  widely  known.  They  are  collected  by 
means  of  a  large  corps  of  correspondents  located  all  over  the  cotton 
states,  who  send  in  their  reports  by  letter  or  by  wire  to  head- 
quarters. The  methods  of  the  Journal  are  molded  very  much 
after  those  of  the  Department  of  Agriculture  in  the  preparation  of 
its  crop  reports.  Much  the  same  methods  are  followed  by  the 
New  York  Commercial.  It  publishes  currently  the  usual  sta- 
tistics, but  in  addition  issues  four  special  crop  editions  during 
the  season,  often  anticipating  the  government  estimates  by 
days  and  coming  remarkably  close  to  the  figures  of  the  latter. 
These  special  editions  refer  to  "  acreage  planted,"  "  prospective 
yield,"  "  conditions  "  in  September,  and  "  total  crop  "  early  in 
December. 

There  are  a  number  of  newspapers  in  the  South  which  report 
on  the  growing  cotton  crop,  some  of  them  for  the  crop  as  a  whole, 
some  of  them  confining  their  attention  more  to  local  conditions. 
The  New  Orleans  Times-Democrat  maintains  correspondents  in 
every  section  of  the  cotton  belt  and  through  them  obtains  and 
publishes  comprehensive  reports  and  a  summary.  In  December, 
a  few  days  prior  to  the  publication  of  the  government's  esti- 
mate, the  Times-Democrat  prints  its  estimate  of  the  season's 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 65 

growth,  and  in  years  past  this  result  has  borne  a  very  close 
correspondence  with  the  actual  figures  appearing  later. 

Among  individuals  and  firms  pubHshing  private  reports  on 
cotton,  the  best  known  are  Henry  G.  Hester,  secretary  of  the  New 
Orleans  Cotton  Exchange;  Oscar  K.  Lyle,  of  the  firm  of  S.  B. 
Chapin  &  Co.,  New  York,  and  the  Mercantile  Cotton  Crop  Re- 
porting Corporation,  New  York,  which  latter  organization 
publish  the  reports  formerly  issued  by  Mr.  Theodore  H.  Price. 
Secretary  Hester's  report  is  an  annual  one,  coming  out  on  Sep- 
tember ist  and  treating  of  the  cotton  crop  to  the  close  of  August. 
Ordinarily,  annual  reports  are  looked  upon  as  of  historical  impor- 
tance only,  but  this  report,  because  of  its  exhaustive  nature  and 
because  of  the  confidence  reposed  in  it,  is  eagerly  watched  for  and 
undoubtedly  exercises  marked  influence  on  the  market.  Secre- 
tary Hester's  data  are  obtained  from  transportation  companies, 
manufacturers,  exchanges,  boards  of  trade  and  expert  corre- 
spondents on  both  sides  of  the  Atlantic.  Much  of  the  detailed 
data  obtained  from  manufacturers,  railroad,  etc.,  is  of  a  confi- 
dential nature,  but  as  he  himself  says,  "  Once  it  became  known 
that  the  effort  of  the  statistician  was  to  arrive  at  correct  aggre- 
gates and  not  to  make  public  the  affairs  of  specific  concerns  there 
has  been  Httle  or  no  hesitancy  in  the  furnishing  of  details."  His 
report  covers  an  analysis  of  the  sources  of  supply  with  a  history 
of  the  year's  crop  compared  with  previous  years;  the  distribu- 
tion of  the  crop  to  American  mills  both  North  and  South,  the 
overland  movement  and  exports;  and  detailed  stocks  on  hand. 

In  the  case  of  Oscar  K.  Lyle's  crop  observations  no  blank  forms 
are  used,  making  a  description  of  his  methods  very  difficult. 
His  results,  however,  are  among  those  which  are  accepted  as 
authoritative  estimates. 

The  method  used  by  the  Mercantile  Cotton  Crop  Reporting 
Corporation  for  obtaining  their  data  is  that  noted  in  several 
previous  instances,  namely,  the  use  of  a  great  number  of  picked 
correspondents  located  in  the  cotton  producing  area.  A  postal  is 
addressed  to  each  one  of  these  asking  for  estimates.  In  compiling 
this  data  a  system  of  weighting  is  used,  and  it  certainly  contrib- 
utes to  a  result  more  scientifically  accurate  than  could  a  simple 


1 66  BUSINESS  STATISTICS 

arithmetic  average  of  all  the  replies  received.  The  county  is  the 
basis  on  which  the  results  are  tabulated.  For  each  State  a  blank 
form  is  used,  giving  the  yield  of  cotton  for  each  county  for  three 
years  past.  The  average  of  these  three  years  is  then  computed; 
another  column  giving  the  percentage  which  the  average  for  the 
county  is  of  the  total  average  crop  for  the  three  years.  This 
column  of  percentages,  then,  gives  the  relative  weight  that  the 
returns  of  each  county  are  going  to  bear  in  making  up  the  total 
for  the  State.  [Table  omitted.]  Having  obtained  a  figure  for 
each  State,  these  are  again  weighed  for  the  final  or  United  States 
result.  Florida  would  be  credited  with  one  per  cent,  while  Texas 
would  have  twenty-eight  per  cent.  If  estimates  of  the  cotton 
crop  are  valuable,  then  the  scientific  method  used  above  for 
arriving  at  a  correct  estimate  is  to  be  encouraged. 

Opposed  to  this  way  of  arriving  at  results  will  be  found  many 
to  which  the  application  of  the  term  scientific  would  be  a  travesty. 
For  instance,  among  doubtful  methods  of  arriving  at  results  the 
following  examples  might  be  cited:  Inquiries  are  sent  to  dealers, 
buyers,  farmers,  etc.,  asking  the  simple  question,  "How  much 
cotton  will  your  county  raise  this  year  ?  "  To  the  sum  of  the 
results  thus  received  seven  and  one-half  per  cent  is  added,  based 
on  the  observations  that  these  correspondents  generally  under- 
estimate the  crop  by  that  amount.  This  latter  result  is  made  the 
basis  of  a  published  estimate  on  the  size  of  the  crop.  Many 
reports  will  be  found  which  are  based  on  no  more  trustworthy 
methods,  and  their  existence  justifies  the  suggestion  that  a  care- 
ful description  of  method  is  due  from  any  organization  which 
issues  reports  to  those  who  receive  reports  and  base  their  opera- 
tions on  them.  More  diligence  in  this  matter  would  mean  less 
opportunity  for  manipulating  the  market. 

In  addition  to  the  statistics  thus  far  discussed  concerning  the 
cotton  crop,  brokers,  producers  and  manufacturers  are  interested 
in  current  prices  on  the  exchanges.  This  subject  needs  only  a 
mention  here,  for  each  exchange  individually  compiles  its  own 
data,  and  by  means  of  the  ticker,  telegraph  and  cable,  and  later 
the  newspapers,  this  information  is  immediately  disseminated  to 
all  interested  parties. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 67 

Sources  of  Information  in  the  Cereal  Markets 

Current  information  in  the  cereal  markets  is  sought  more 
eagerly  than  any  other  data  in  the  produce  markets,  owing  to  the 
commanding  importance  which  grain  occupies.  The  system  of 
trading  in  futures  is  greater  in  wheat  even  than  it  is  in  cotton,  and 
just  in  proportion  as  it  is  greater  there  is  greater  demand  for  data 
as  to  current  happenings. 

It  was  to  forecast  the  probable  wheat  crop  that  the  government 
crop  reports  were  first  undertaken.  From  a  small  beginning  they 
have  grown  in  scope  until  today  they  cover  almost  everything 
grown  in  the  United  States  that  can  be  considered  of  commercial 
importance.  Those  parts  of  the  reports  deaUng  with  the  cereal 
crops  which  are  traded  in  on  exchanges  are  as  follows :  The  March 
report  gives  the  stocks  of  grain  in  farmers'  hands;  the  distribu- 
tion and  consumption  of  corn,  wheat  and  oats;  and  the  average 
natural  weight  of  wheat  and  oats.  The  April  schedule,  the  first 
which  gives  condition  reports,  deals  with  the  condition  of  winter 
wheat  and  rye.  In  May  further  reports  are  made  upon  the  con- 
dition of  winter  wheat,  rye,  meadow  lands  and  spring  pasture.  It 
also  covers  the  portion  of  the  original  acreage  of  winter  wheat 
that  has  been,  or  will  for  any  reason  have  to  be,  abandoned.  In 
June  the  acreage  of  all  the  important  crops  is  reported  on,  chief 
among  which  is  spring  wheat.  The  condition  of  wheat,  oats, 
barley,  rye,  clover  and  spring  pasture  is  dealt  with.  The  July 
schedule  gives  the  acreage  planted  to  corn;  the  stocks  of  wheat  in 
farmers'  hands;  and  the  condition  figures  as  before.  Condition 
figures  are  reported  for  all  crops  up  to  September,  when  most  of 
the  smaller  cereals  are  harvested.  The  condition  of  corn  is 
reported  on  in  October,  and  in  the  annual  report  for  December 
the  condition  of  winter  wheat  and  rye  planted  for  the  following 
year's  crop  is  dealt  with.  In  addition  to  these  data,  the  estimated 
average  yield  of  winter  wheat  and  the  stocks  of  oats  in  farmers' 
hands  are  dealt  with  in  August;  the  average  )deld  and  quality  of 
spring  wheat,  barley,  oats  and  rye  in  October;  and  the  average 
yield  per  acre  of  corn  in  November.  The  annual  report  of  the 
crop  reporting  board  comes  out  in  December,  when  all  crops  are 


1 68  BUSINESS  STATISTICS 

harvested  and  it  is  possible  to  obtain  trustworthy  estimates  of 
the  total  crops.  The  production  and  prices  of  all  the  principal 
crops  are  dealt  with  in  this  schedule,  together  with  the  acreage  of 
winter  wheat  and  rye  sown  for  the  crop  of  the  following  year. 
The  government's  weekly  weather  reports  are  watched  in  the 
grain  markets  equally  as  closely  as  in  cotton.  In  fact,  some 
brokers  will  go  so  far  as  to  say  that  a  careful  observance  of 
weather  conditions  throughout  the  producing  area  will  enable 
them  to  anticipate  very  closely  the  result  of  a  coming  crop  report. 

Aside  from  the  government  reports  there  are  three  agencies  for 
securing  news  in  the  grain  markets.  They  are  (i)  the  grain 
exchanges  and  allied  organizations;  (2)  large  commission  and 
brokerage  firms,  which  make  a  canvass  by  correspondence;  and 
(3)  the  private  crop  expert,  the  latter  analogous  to  those  already 
noted  in  the  cotton  market. 

The  grain  exchanges  annually  spend  enormous  sums  of  money 
in  compiling  statistics  of  their  own  dealings.  Nearly  every  ex- 
change maintains  a  committee  whose  duty  this  shall  be.  The 
practice  of  the  Philadelphia  Commercial  Exchange  is  typical. 
Its  by-laws  state  that  "  The  committee  on  information  and 
statistics  shall  have  supervision  of  the  Hbrary  of  the  exchange, 
and  all  matters  pertaining  thereto.  ...  It  shall,  unless  other- 
wise directed,  have  charge  of  newspapers,  market  reports,  tele- 
graphic and  statistical  information  for  the  use  of  the  exchange; 
and  it  shall  be  the  duty  of  the  said  committee  to  organize  plans 
for  obtaining  regularly,  and  at  the  earliest  moment,  such  reliable 
information  as  may  affect  the  value  of  articles  dealt  in  by  the 
members  of  the  exchange." 

The  Philadelphia  Exchange  publishes  each  day  a  record  of 
stocks  held  in  elevators,  vessels  or  cars  loaded,  and  daily  receipts 
and  shipments.  [A  reduced  facsimile  of  one  of  their  daily  reports 
is  omitted.]  Some  of  the  exchanges  go  further  and  attempt 
to  compile  summaries.  The  Chicago  Board  of  Trade,  for  in- 
stance, compiles  figures  of  visible  supplies  of  grain.  But  in  this 
immediate  connection  the  work  that  is  best  known  and  has  most 
general  acceptance  throughout  the  country  is  that  of  Bradstreet^s 
Trade  Review.     Bradstreet's  collects  the  figures  of  stock   of 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     169 

grain  on  hand  at  the  grain  supply  centers  by  means  of  agents  and 
the  use  of  the  telegraph,  and  the  total  is  published  in  the  journal 
of  that  name.  Visible  supply  figures  are  also  published  weekly  by 
Dun's  Review. 

The  greatest  organization  of  all,  either  in  this  country  or 
abroad,  dealing  with  the  grain  exchanges  as  a  whole  is  BroomhalFs 
Agency.  Broomhall's  Agency  has  become  the  ofiicial  represen- 
tative of  practically  every  important  grain  exchange  in  the  world. 
Its  method  of  operation  is  well  described  by  Mr.  G.  P.  Broomhall, 
the  American  representative,  in  a  letter  to  the  writer:  "  We  have 
no  regular  forms  which  we  send  to  our  correspondents,  but  our 
agents  send  us  advices,  some  daily,  others  weekly,  either  by  mail 
or  wire  and  also  by  cable.  We  have,  for  instance,  about  three 
hundred  agents  and  correspondents  scattered  all  through  the 
important  grain-producing  countries,  and  any  change  in  weather 
conditions,  say  in  Russia  or  Argentine,  is  at  once  cabled  to  our 
Liverpool  ofl&ce,  from  which  point  it  is  again  disseminated,  in 
America,  for  instance,  by  this  ofl&ce  "  [the  New  York  ofl&ce]  "  to 
private  subscribers  here  at  New  York,  and  they  in  turn  wire  the 
information  over  their  private  wires  to  Chicago  and  the  far  West. 
We  are  the  foreign  correspondents  for  the  Chicago  Board  of 
Trade,  and  since  January  ist  this  year  [191 1]  are  supplying  the 
New  York  Produce  Exchange  with  all  their  foreign  information. 
The  Buenos  Ayres  Grain  Exchange  also  receives  our  foreign  grain 
service,  and  also  the  Liverpool  grain  exchanges. 

"  All  the  largest  exchanges  in  the  world  which  handle  grain  use 
our  foreign  cabled  grain  service.  We  have  agents  on  all  these 
markets  and  through  them  we  obtain  the  ofi&cial  prices  posted  on 
them,  and  they  are  in  turn  sent  to  Liverpool  and  again  redis- 
tributed to  other  exchanges.  Statistical  information,  such  as 
exports,  receipts,  shipments,  are  also  gathered  by  our  agents  and 
sent  to  Liverpool,  who  in  turn  have  them  tabulated  and  sent 
through  the  various  countries.  For  instance,  each  Saturday 
afternoon  I  personally  compile  the  shipments  of  wheat,  corn  and 
flour,  that  is,  the  amount  of  grain  shipped  from  the  different  ports 
in  this  country  for  the  week.  We  have  agents  at  all  the  ports  on 
the  Atlantic  and  Pacific  seaboard  and  they  send  me  in  by  mail 


I70  BUSINESS  STATISTICS 

and  wire  the  amount  of  grain  shipped  for  the  week,  and  after 
condensing  same  I  cable  this  information  to  my  Liverpool  office, 
and  they,  after  receiving  the  returns  from  our  agents  in  Russia, 
Argentine,  India,  Australia  and  any  other  exporting  countries, 
are  able  by  this  to  compile  the  total  amount  of  wheat  shipped  for 
the  week  from  all  countries.  .  .  .  Our  head  office  in  Liverpool  is 
the  center  to  which  all  information  is  mailed,  wired  and  cabled, 
and  they  in  turn  through  the  different  exchanges  are  able  to  have 
the  information  made  public  all  through  the  world."  BroomhalFs 
Corn  Trade  News  is  the  official  paper  of  this  agency,  a  special 
edition  of  which  is  published  in  New  York.  Prices  are  sent  from 
New  York  to  Liverpool  and  posted  on  the  exchange  board  within 
six  minutes,  and  direct  communication  from  New  York  to 
Argentine  is  accomplished  within  fifteen  minutes. 

In  addition  to  the  methods  just  described  for  collecting  and 
compiling  data,  many  of  the  larger  grain  commission  and  broker- 
age houses,  such  as  Finley  Barrell  &  Co.,  Chicago;  Logan  & 
Bryan,  New  York;  Bar  tie  tt  Frazier  Company,  New  York;  and 
S.  B.  Chapin  &  Co.,  New  York,  make  a  practice  of  canvassing  the 
intelligent  opinion  of  men  located  in  the  grain  belt  for  the  purpose 
of  estimating  the  conditions  of  the  grain,  the  acreage,  etc.  As  an 
example,  Finley  Barrell  &  Co.  recently  mailed  to  some  five 
thousand  individual  correspondents  postal  cards  having  the 
following  questions  concerning  the  corn  crop: 

Has  corn  crop  turned  out  better  or  poorer  than  expected  ? 

Are  husking  returns  larger  or  smaller  than  expected  ? 

What  is  the  present  condition  of  corn  ? 

Are  farmers  satisfied  with  present  prices  ? 

Have  they  sold  new  corn  freely  ? 

Will  movement  to  market  be  free  ? 

How  soon  will  it  commence  ? 

A  great  number  of  these  correspondents  are  in  daily  communi- 
cation with  their  firms  and  are  able  to  inform  the  latter  of  any 
circumstance  of  sufficient  importance  to  justify  a  special  investi- 
gation. In  fact,  Mr.  S.  S.  Daniels,  editor  of  the  market  reports  of 
the  Philadelphia  Commercial  Exchange,  is  authority  for  the 
statement  that  these  reports  coming  in  daily  over  cables,  wires 
and  tickers  are  the  greatest  general  factor  influencing  prices. 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     171 

The  private  crop  experts  are  usually  in  the  employ  of,  or 
represent,  some  large  firm  or  commission  merchants.  Here  as 
elsewhere  it  will  be  found  that  there  are  both  good  and  bad. 
Numbers  of  so-called  crop  experts  publish  misleading  crop  reports 
in  order  to  influence  the  market  in  the  interest  of  speculators.  But 
there  are  a  number  —  one  broker  puts  it  at  less  than  one  and  one- 
half  dozen  —  of  genuine  crop  experts,  men  of  mature  judgment 
whose  business  it  is  to  give  disinterested  and  impartial  advice  on 
the  growing  crops  and  whose  opinions  can  be  depended  upon  to 
represent  the  facts  as  they  know  them.  Foremost  among  such 
men  in  this  country  are  Mr.  John  M.  Inglis,  with  Logan  &  Bryan, 
New  York;  Mr.  B.  W.  Snow,  of  Bartlett  Frazier  Company,  New 
York;  Mr.  Oscar  K.  Lyle,  of  S.  B.  Chapin  &  Co.,  New  York;  and 
Mr.  George  M.  Le  Coimt,  with  Finley  Barrell  &  Co.,  Chicago. 
Representatives  of  any  of  these  firms  can  usually  be  found  on  any 
important  grain  exchange. 

These  different  men  use  different  methods.  The  method  of  Mr. 
Le  Count,  for  instance,  is  that  of  direct  observation,  going  into 
and  through  the  grain  growing  sections  of  the  country  and 
minutely  examining  the  growing  crops.  Snow's  reports,  on  the 
other  hand,  are  the  result  of  an  organization  almost  as  compli- 
cated as  and  modeled  upon  the  government  crop  reporting  ser- 
vice. Needless  to  say,  these  men,  while  classified  together  here, 
perform  functions  differing  the  one  from  the  other. 

The  Coffee  Market 

The  coffee  market,  like  the  grain  market,  looks  to  the  exchanges 
for  its  current  information.  The  production  of  coffee  is  localized 
as  is  probably  no  other  commodity  sold  today  by  the  exchange 
method.  By  far  the  largest  part  of  the  world's  supply  is  grown  in 
the  State  of  Sao  Paulo,  Brazil.  A  small  portion  comes  from  the 
East  Lidies.  The  exchanges  which  are  instrumental  in  fixing  the 
prices  of  coffee  are  New  York,  Havre,  Bremen  and  Hamburg. 
There  are  some  private  reports  on  coffee,  but  the  superintendent 
of  the  New  York  Coffee  Exchange  is  authority  for  the  statement 
that  with  one  exception  they  have  no  influence  on  the  market. 
That  report  is  the  one  issued  by  Messrs.  Willet  and  Gray,  of 
New  York. 


172  BUSINESS  STATISTICS 

The  great  source  of  information  in  the  United  States  on  the 
coffee  market  is  the  New  York  Coffee  Exchange.  It  publishes 
daily,  monthly  and  annual  reports;  its  figures  are  accepted  as 
accurate  throughout  the  world,  and  its  reports  are  looked  forward 
to  with  great  interest  by  the  trade.  The  statistical  work  of  this 
exchange  consists  in  collecting  and  compiHng  daily  detailed 
information  as  to  the  prices  of  coffee  on  its  own  floor,  at  Havre, 
Hamburg  and  Rio  de  Janeiro;  stocks  on  hand  with  their  location; 
daily  and  weekly  receipts  and  deliveries  from  all  important  ware- 
houses of  the  world;  coffee  afloat,  with  source  of  origin  and  desti- 
nation; and,  lastly,  reports  on  weather  and  temperature  in  the 
regions  of  coffee  production.  This  information  furnishes  a  com- 
plete report  of  the  daily  condition  of  the  growing  crop,  the  location 
and  the  movement  of  stocks  on  hand  and  the  prices  ruling  on  the 
important  exchanges. 

These  daily  reports  are  further  condensed  into  a  monthly  sum- 
mary of  the  figures  enumerated  above.  The  most  important  item 
of  the  monthly  report  is  the  table  of  the  world's  visible  supply, 
and  it  is  looked  forward  to  each  month  with  great  interest.  The 
visible  supply  figures  are  also  compiled  by  two  European  organi- 
zations, viz.,  Messrs.  Duuring  &  Zoon,  of  Rotterdam,  and  Mr.  E. 
Laneuville,  of  Havre.  The  three  separate  totals  show  a  very 
small  difference. 

The  Annual  Supplement  of  coffee  exchange  report  summarizes 
in  more  condensed  form  the  reports  already  noted  and  is  of 
historical  value  principally.  It  serves,  of  course,  to  afford  a 
quick  comparison  for  a  series  of  years  as  regards  the  total  yield, 
the  movement  of  the  crop  to  points  of  consumption,  and  the 
comparative  prices. 

Metal  Statistics 

Information  dealing  with  the  metal  market  may  be  grouped 
under  three  heads,  viz.,  (i)  Sources  of  current  statistics;  (2)  trade 
papers  publishing  current  information;  and  (3)  annual  statistical 
publications.    The  following  are  the  important  ones:  — 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 73 

1.  Sources  of  Current  Statistics 

A.  United  States  Statistics: 

American  Iron  and  Steel  Association,  261  S.  4th  St.,  Philadelphia. 

Copper  Producers'  Association,  No.  i  Liberty  St.,  New  York. 

Horace  J.  Stevens,  ed.,  The  Copper  Handbook,  Houghton,  Mich. 

Iron  Trade  Review,  Cleveland,  O. 

Engineering  and  Mining  Journal,  New  York. 

United  States  Steel  Corporation,  Monthly  Report  of  unfilled 

orders. 
Custom  House  returns. 

B.  English  and  Foreign  Statistics: 
Julius  Matton,  25  Rood  Lane,  London. 
Henry  Merton  &  Co.,  Ltd.,  London. 
Vivian,  Younger  &  Bond,  London. 

2.  Trade  Papers  Publishing  Current  Information 

Journal  of  Commerce  and  Commercial  Bulletin,  New  York. 

Iron  and  Coal  Trades  Review,  London. 

Iron  Trade  Review,  Cleveland. 

Iron  Age,  New  York. 

Mineral  Industry,  New  York. 

Engineering  and  Mining  Journal,  New  York. 

American  Metal  Market  and  Daily  Iron  and  Steel  Report.  Pub- 
lished by  the  American  Metal  Market  Co.,  81  Fulton  St., 
New  York. 

The  Steel  and  Metal  Digest  (monthly).  Published  by  the  American 
Metal  Market  Co.,  81  Fulton  St.,  New  York. 

Bulletin  of  the  American  Iron  and  Steel  Association,  261  S.  4th  St., 
Philadelphia. 

3.  Annual  Statistical  Publications 

Statistical  Report  of  the  American  Iron  and  Steel  Association,  261  S. 
4th  St.,  Philadelphia. 

Metal  Statistics,  published  by  the  American  Metal  Market  Co., 
81  Fulton  St.,  New  York. 

Publication  of  the  United  States  Geological  Survey. 

Commerce  and  Navigation  of  the  United  States,  pubUshed  by  the 
Bureau  of  Statistics,  Washington,  D,  C. 

The  Copper  Handbook,  published  by  Horace  J.  Stevens,  Hough- 
ton, Mich. 

Comparative  Statistics  of  Lead,  Copper,  Spelter,  Tin,  Aluminum ^ 
Nickel,  Quicksilver  and  Silver,  compiled  by  the  Metal  sgesell- 
schaft,  the  Metallurgische-Gesellschaft  A.-G.  and  the  Berg 
and  Metalbank  Aktiengesellschaft,  Frankfurt-am-Main, 
Germany. 

Directory  of  Iron  and  Steel  Works  in  the  United  States,  pubUshed 
by  the  American  Iron  and  Steel  Association. 


174  BUSINESS  STATISTICS 

This  classification  is  made  on  the  basis  of  nearness  to  the  source 
whence  the  statistics  originate  both  in  time  and  place,  the  inten- 
tion being  to  show  as  nearly  as  possible  in  all  cases  the  original 
source  from  which  the  information  is  compiled,  the  channels  by 
which  it  first  reaches  the  general  public,  and  then  the  annual 
volumes  into  which  it  finally  finds  its  way  and  is  permanently 
preserved. 

The  pioneer  collecting  agency  for  iron  and  steel  statistics  in  the 
United  States  is  the  American  Iron  and  Steel  Association.  Its 
statistical  work  relates  mainly  to  the  operation  of  all  the  iron  and 
steel  works  of  the  United  States,  covering  the  production  of  the 
blast  furnaces,  rolling  mills  and  steel  works.  So  thoroughly  does 
this  organization  do  its  work  and  in  such  confidence  is  it  held  by 
the  trade  that  its  data  are  accepted  everywhere  as  authoritative. 
Its  inquiries  are  sent  to  each  individual  manufacturer  with 
requests  for  his  own  production.  These  returns  are  then  sum- 
marized by  districts,  states  and  for  the  whole  country.  Much  of 
the  success  of  the  association  in  obtaining  data  is  due  to  its 
method  of  disclosing  to  no  person  the  results  for  individual  estab- 
lishments. It  pubHshes  only  the  summaries.  It  sends  out  regular 
blank  forms  of  a  most  comprehensive  nature  on  which  returns  are 
made. 

The  Iron  Trade  Review^  of  Cleveland,  a  trade  paper,  collects 
from  the  mines  of  the  Lakes  Region  their  annual  output  of  iron 
ore.  While  this  is  an  annual  publication,  it  is  the  only  publication 
of  its  kind,  and  is  looked  forward  to  with  great  interest.  It  is 
republished  in  every  important  paper  which  reports  on  the  metal 
markets. 

What  is  done  for  iron  and  steel  by  the  two  organizations  just 
noted  is  done  in  much  the  same  manner  for  copper  by  two  other 
organizations,  viz.,  the  Copper  Producers'  Association,  of  No.  i 
Liberty  Street,  New  York  City,  and  Horace  J.  Stevens,  editor  of 
The  Copper  Handbook,  Houghton,  Michigan.  The  former  is  an 
association  created  and  supported  by  about  a  dozen  copper  pro- 
ducing companies.  And  since  these  companies  control  the  entire 
output,  the  production  of  copper  is  concentrated  in  a  way  that 
makes  the  gathering  of  data  a  simple  matter.    The  Copper  Pro- 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     175 

ducers'  Association  has  to  deal  with  these  few  companies  only. 
The  reports  are  published  monthly  and  deal  exclusively  with 
copper  in  marketable  condition. 

The  best  available  source  of  statistics  of  mine  production  and 
of  general  information  concerning  copper  and  copper  mining  com- 
panies is  that  published  by  Horace  J.  Stevens  in  his  annual 
Copper  Handbook.  In  an  extended  letter  to  the  writer,  Mr.  Stevens 
explains  his  method  of  collecting  statistics  and  the  importance  of 
this  subject  justifies  a  reproduction  in  substance  of  his  statement. 
With  an  annual  request  which  he  sends  to  mine  owners  he  in- 
closes a  blank  question  sheet  of  a  most  exhaustive  nature.  This 
request  goes  to  the  ten  thousand  and  more  companies  that  are 
described  in  the  Handbook  and  also  to  several  thousand  others 
who  are  not  there  included.  In  addition  to  these  he  utilizes  other 
sources  of  information,  as  follows:  Different  governments  of  the 
world,  through  the  proper  departments,  are  requested  to  send 
official  reports  and  other  information  not  published  but  on  file. 
All  reports  of  mining  companies  are  kept  on  file,  as  are  also  the 
prospectii  of  new  companies.  The  services  of  a  clipping  bureau 
are  utilized  and  a  cKpping  bureau  is  maintained  in  his  own 
ofiice.  One  of  his  most  valuable  sources  of  information  comes 
from  his  correspondence  with  mining  engineers  throughout  the 
world. 

Of  first  hand  material  two  other  sources  must  still  be  noted. 
The  United  States  Steel  Corporation  now  publishes  a  monthly 
report  of  its  unfilled  orders,  and,  due  to  its  commanding  position 
in  the  iron  and  steel  business,  this  report  is  taken  as  indicative  of 
the  current  condition  of  that  industry.  The  report  is  looked 
forward  to  with  great  interest  by  brokers.  The  custom  house 
furnishes  currently  to  the  trade  the  figures  of  imports  and  exports 
of  metals,  which  later  come  out  in  the  monthly  and  annual  sum- 
maries. For  English  and  foreign  data  there  are  three  firms  in 
London  whose  names  are  well  known.  No  more  than  a  mere 
mention  of  them  is  necessary  here.  They  are  Julius  Matton, 
25  Rood  Lane;  Henry  R.  Merton  &  Co.,  Limited,  and  Vivian, 
Younger  &  Bond.  Their  statistics  of  production  and  prices 
appear  in  the  weekly  editions  of  the  Iron  and  Coal  Trades  Review 


176  BUSINESS  STATISTICS 

(London),  and  they  are  credited  with  a  large  part  of  the  foreign 
statistics  in  the  principal  annual  publications. 

The  second  step  in  the  distribution  of  this  enormous  mass  of 
information  is  its  publication  by  the  trade  papers.    A  detailed 
description  of  the  reports  of  each  of  these  journals  is  not  neces- 
sary. The  general  objection  that  can  be  directed  at  most  of  them  is 
that  they  are  first  technical  journals,  dealing  with  the  mechanical 
side  of  mining  and  are  only  secondarily  trade  journals,  publishing 
market  news.     The  result  of  this  is  that  their  market  reports  are 
in  many,  if  not  most,  cases  meager  in  the  extreme.     Some  of  them, 
as,  for  instance,  the  Iron  Trade  Review  and  the  Engineering 
and  Mining  Journal  are  important  more  because  of  the  original 
material  they  compile  than  for  their  market  reports.     The  New 
York  Journal  of  Commerce  is  a  model  among  the  trade  news- 
papers in  this  country.    Its  reports  are  full,  are  well  classified 
and   are  not  too  much  intermingled  with  "  opinions."      The 
Iron  and  Coal  Trades  Review  (London)  is  also  a  model  trade 
paper.     Its  weekly  edition  has  separate  divisions  devoted  to 
each  of  the  important  metal  markets,  beginning  with  a  concise 
statement  of  the  condition  of  the  market,  followed  with  a  small 
and  concise  table  of  statistics  comprising  prices,  production,  etc. 
A  large  part  of  the  value  of  its  reports  is  due  to  the  arrangement 
of  the  material  in  such  a  way  that  the  substance  can  be  quickly 
grasped  without  the  necessity  of  disentangling  it  from  a  mass  of 
unimportant  data.    The  pioneer  effort  in  the  way  of  a  daily  paper 
devoted  exclusively  to  the  metal  markets  belongs  to  the  American 
Metal  Market  Company.     Its  daily  publication,  the  American 
Metal  Market  and  Daily  Iron  and  Steel  Report,  today  publishes 
the  best  reports  on  production,  prices  and  news  of  the  metal 
trades,  and  it  bids  fair  to  become  the  sort  of  paper  that  is  needed. 
The  monthly  publication  of  the  same  organization.  The  Steel 
and  Metal  Digest,  presents  the  same  data  in  a  somewhat  less 
detailed  and  more  summarized  form  monthly.     The  American 
Iron  and  Steel  Association  issues  a  monthly  bulletin  dealing  with 
the  statistics  it  has  compiled.    Practically  all  the  daily  newspapers 
in  the  large  cities  publish  daily  reports  on  the  metal  markets. 
Most  of  these  leave  much  to  be  desired.   They  give  only  a  fleeting 


STATISTICAL  INDICES  OF  BUSINESS  CONDITIONS     1 77 

impression  of  the  market  and  are  hardly  trustworthy  for  one 
whose  interest  demands  definite  and  detailed  facts. 

The  work  of  the  annual  publications  consists  in  collecting  the 
information  already  enumerated  and  putting  it  in  permanent 
form.  Foremost  among  these  is  the  Annual  Statistical  Report 
of  the  American  Iron  and  Steel  Association,  which  embodies  the 
yearly  results  of  the  work  of  the  association.  The  Directory  of 
Iron  and  Steel  Works,  published,  or  revised,  every  three  or  four 
years  by  the  same  organization,  is  the  only  publication  of  its  kind 
in  the  United  States  and  is  an  invaluable  work.  Metal  Statis- 
tics, published  by  the  American  Metal  Market  Company,  is  a 
comparatively  recent  publication,  the  fourth  edition  appearing  in 
191 1.  It  is  somewhat  smaller  and  more  condensed  than  the  one 
first  enumerated  and  presents  in  a  concise  handy  pocket  volume 
the  important  data.  Its  statistics  are  taken  from  the  compilation 
of  the  Iron  and  Steel  Association.  The  Copper  Handbook,  edited 
and  published  by  Horace  J.  Stevens,  is  the  best  and  practically 
the  only  volume  dealing  exhaustively  with  copper.  The  United 
States  Government  furnishes  annual  figures  which  cannot  be 
obtained  elsewhere.  In  the  annual  reports  of  the  United  States 
Geological  Survey  are  to  be  found  figures  of  the  production  and 
consumption  of  metals  in  the  United  States,  and  the  annual 
volume  on  Commerce  and  Navigation  of  the  United  States, 
published  by  the  Bureau  of  Statistics,  furnishes  figures  of  imports 
and  exports  of  metals.  Last  to  be  noted  is  the  most  exhaustive 
publication  of  all  dealing  with  metals,  viz.,  Comparative 
Statistics  of  Lead,  Copper,  Spelter,  Tin,  Aluminum,  Nickel, 
Quicksilver  and  Silver,  published  at  Frankfurt-am-Main,  Ger- 
many. This  is  a  compilation  by  the  Metalsgesellschaft,  the 
Metallurgische-Gesellschaft  A.-G.  and  the  Berg  and  Metalbank 
Aktiengesellschaft,  the  sources  of  its  statistics  being  in  many 
instances  the  organizations  already  noted,  but  they  are  collected 
here  in  an  exhaustive  way  nowhere  else  to  be  found.  The  pos- 
session of  this  compilation  is  indispensable  to  one  who  has  large 
interests  in  the  metal  markets. 


CHAPTER  III 

SALES  AND  ADVERTISING  STATISTICS 

Introduction 

In  retail  stores,  in  wholesale  houses,  and  in  the  sales  and  advertis- 
ing departments  of  manufacturing  establishments,  whether  large 
or  small,  statistical  records  are  essential  to  intelligent  manage- 
ment. The  selections  which  are  reprinted  in  this  section  illustrate 
the  chief  applications  of  statistics  to  the  management  of  sales  and 
advertising  departments  of  manufacturing  companies  and  to  the 
administration  of  mercantile  businesses.  For  convenience  the 
subject  is  subdivided  into  four  parts  —  (i)  market  analysis,  (2) 
sales  reports  and  records,  (3)  advertising  statistics,  and  (4)  sta- 
tistics used  in  retail  stores  —  all  of  which  are  closely  related  in 
principle.  Since  market  analysis  requires  the  use  of  both  external 
and  internal  statistics,  that  subject  is  taken  up  first. 

Market  Analysis 

In  order  to  determine  to  which  particular  class  of  customers  his 
sales  campaign  should  be  directed,  a  manufacturer  finds  it  neces- 
sary to  study  his  market  carefully  under  present  conditions  of 
keen  competition.  Blunderbuss  methods  are  wasteful;  hence 
they  are  becoming  antiquated.  The  demand  for  any  article 
varies  according  to  purchasing  power,  living  conditions,  occupa- 
tions, racial  characteristics,  cHmatic  conditions,  and  numerous 
other  influences  affecting  the  different  classes  of  consumers.  The 

/Object  of  market  analysis  is  to  determine  which  class  or  classes  of 
consumers  constitute  the  potential  market  for  the  product,  to 
ascertain  where  that  class  is  located,  and  to  find  out  what  channels 
of  distribution  are  most  readily  available  for  reaching  them.    In 

^making  such  an  analysis  statistics  are  serviceable. 

There  are  few,  if  any,  commodities  for  which  equal  per  capita 
sales  may  be  expected  in  all  sections  of  the  market,  provided  the 

178 


SALES  AND  ADVERTISING  STATISTICS  1 79 

market  is  more  than  local  in  its  scope.  In  each  district  there  are 
numerous  classes  of  consumers  with  widely  different  tastes  and 
desires,  and  the  relative  proportions  of  these  classes  in  different 
districts  always  vary.  In  New  York  City,  for  example,  the  popu- 
lation of  the  metropoUtan  district  in  1910  was  6,475,000.  In  the 
same  year  the  population  of  the  Cleveland  metropolitan  district 
was  613,000.  From  these  figures  it  cannot  be  assumed  that  the 
New  York  market  for  any  particular  article  is  potentially  ten 
times  as  great  as  that  of  Cleveland.  New  York  represents  the 
extremes  of  wealth  and  poverty.  Fifth  Avenue  and  the  Lower 
East  Side  are  at  opposite  ends  of  the  economic  scale.  Their 
wants  and  their  purchasing  power  are  wholly  unlike  and  each 
differs  from  the  large  middle-class  strata.  In  Cleveland  the  rela- 
tive proportions  of  these  several  classes,  with  their  numerous 
gradations  of  purchasing  power  and  of  wants,  are  not  the  same  as 
in  New  York.  The  population  of  Cleveland,  furthermore,  differs 
in  its  composite  parts  from  that  of  Cincinnati  or  other  cities,  and 
these  differences  in  the  make-up  of  the  population  affect  potential 
demand.  Another  line  of  demarcation  is  between  urban  and  rural 
districts.  Because  of  these  diversities  a  reliable  estimate  of 
potential  demand  can  seldom  be  made  upon  a  gross  per  capita 
basis. 

In  analyzing  the  market  for  some  products,  conditions  other 
than  those  of  a  strictly  personal  nature  must  be  taken  into 
account.  A  manufacturer  of  electric  flat-irons,  for  example,  in 
analyzing  his  market  found  that  in  one  city  of  300,000  population 
25,000  families  were  supplied  with  central  station  electric  current. 
Thus  there  were  25,000  possible  customers  in  that  city.  In 
another  city  of  approximately  the  same  size  only  3,000  famiHes 
were  suppHed  with  electric  current;  hence  the  potential  market 
in  this  second  city  was  much  smaller. 

For  some  products  the  market  is  clearly  defined;  in  such  cases 
the  market  is  easily  analyzed  by  the  manufacturer.  The  manu- 
facturer of  machine  tools,  for  example,  knows  that  his  product 
can  be  sold  only  to  machine  shops  and  engineering  works  and  his 
task  is  to  learn  all  the  establishments  existing  and  planned  for  in 
the  territory  that  he  wishes  to  cover  with  his  sales  organization. 


l8o  BUSINESS  STATISTICS 

The  leather  tanner  can  expect  to  sell  his  product  in  quantity  only 
to  shoe  manufacturers  and  others  for  whom  leather  is  a  crude 
material.  In  order  to  obtain  a  basis  for  his  sales  estimates,  the 
tanner's  task  is  likewise  to  secure  the  names  and  addresses  of  his 
possible  customers  and  to  find  out  the  volume  of  their  businesses. 
A  similar  situation  confronts  other  producers  of  equipment  and 
materials  that  are  sold  to  manufacturers.  Certain  manufac- 
turers of  specialties  sold  to  other  classes  of  customers  can  en- 
compass their  market  in  a  list  that  does  not  assume  excessive 
proportions;  a  manufacturer  of  surgical  appliances,  for  example, 
can  readily  obtain  and  utilize  a  practically  complete  list  of  possible 
customers.  For  the  great  mass  of  goods  sold  at  retail,  however, 
and  for  general  supplies  sold  to  manufacturers,  the  market  is  of  a 
different  type  and  potential  demand  is  much  less  easily  estimated. 

Several  examples  of  methods  that  have  been  used  in  market 
analysis  are  given  in  the  selections  reprinted  in  this  chapter. 
There  are  many  other  statistics  applicable  to  market  analyses  for 
other  sorts  of  commodities  and  still  other  statistics  are  occa- 
sionally used  which  are,  however,  of  questionable  utility.  This 
latter  class  deserves  examination. 

In  undertaking  an  analysis  of  the  market  for  an  article  which  is 
sold  over  a  wide  territory  and  for  which  a  market  index  can  be 
selected  only  with  difficulty,  too  much  attention  may  be  given  to 
wealth  statistics,  which  are  assumed  to  indicate  incomes  received 
by  consumers.  Wealtii^tatistics,  as  a  rule,  have  httle  significance 
in  market  analysis.  In  the  first  place  there  are  no  reliable  wealth 
statistics  andTm  the  second  place,  even  if  such  statistics  were 
/  available,  they  would  give  sHght  clue  to  the  probable  demand  for 
any  particular  article.  Wealth  statistics  are  published,  to  be  sure, 
by  the  United  States  Government,  but  they  are  rough  approxi- 
mations. Land  values,  always  difficult  of  determination  on  a 
comprehensive  scale,  make  up  a  considerable  part  of  the  total 
wealth  estimate  and  numerous  other  items  are  included,  the  value 
of  which  cannot  be  determined  with  exactness.  These  figures, 
.  furthermore,  represent  chiefly  the  value  of  tangible  property, 
which  is  reported  as  part  of  the  wealth  of  the  district  where  the 
property  is  located  though  it  may  be  largely  owned  by  stock- 


SALES  AND  ADVERTISING  STATISTICS  l8l 

holders  or  others  who  reside  elsewhere  and  spend  in  other  markets 
their  income  from  the  property. 

Wealth  statistics  are  commonly  reduced  to  a  per  capita  basis, 
but  a  per  capita  wealth  figure  is  of  little  worth  for  any  purpose, 
for  it  does  not  show  the  distribution  of  the  wealth.  It  makes  a 
vast  difference  to  a  manufacturer  looking  for  prospective  markets 
whether  the  wealth  in  any  district  is  fairly  evenly  distributed 
among  the  consumers  or  concentrated  largely  in  the  hands  of  a 
few  very  rich  persons;  the  quantity  of  any  commodity  purchased 
by  an  individual  consumer  seldom  varies  in  direct  proportion  to 
his  wealth  or  income.    The  man  with  an  income  of  $50,000  does 

I  not  buy  fifty  times  as  much  food  nor  fifty  times  as  many  watches 
as  the  man  with  an  income  of  $1,000. 

^"  Finally,  even  if  the  wealth  figures  were  available  in  such  form 
that  they  could  be  relied  upon  and  the  distribution  of  the  wealth 
among  the  population  ascertained,  the  figures  would  not  accu- 
rately indicate  market  potentialities.  Not  only  are  wealth 
statistics  inadequate  indices  of  incomes,  but  different  classes  of 
people  engaged  in  different  occupations  and  living  under  different 
conditions  do  not  expend  their  incomes  in  the  same  way  even  if 
those  incomes  are  approximately  equal. 

Average  wages  are  another  set  of  statistics  occasionally  referred 
to  as  furnishing  an  index  of  potential  demand.  The  United 
States  Bureau  of  the  Census  publishes  average  wage  statistics, 
and  similar  figures  may  be  obtained  from  other  sources.  An 
average  wage,  however,  for  all  the  persons  engaged  in  manufac- 
turing in  Massachusetts,  for  example,  includes  the  wages  of 
numerous  highly  skilled  workmen  and  also  the  wages  of  unskilled 
men,  women,  and  children.  The  average  is  not  representative 
and  does  not  indicate  that  Massachusetts  is  necessarily  a  poorer 
potential  market  for  any  manufacturer  than  some  other' States 
where  the  average  wages  may  be  higher. 

Per  capita  consumption  figures  for  large  groups  of  commodi- 

\  I)  ties,  such  as  clothing  or  foodstuffs,  are  finding  their  way  into  some 
advertising  publications,  as  affording  a  guide  to  potential  markets. 
The  only  per  capita  consumption  figures  which  are  worthy  of  con- 
sideration are  those  for  such  articles  as  coffee  or  sugar,  where 


1 82  BUSINESS  STATISTICS 

fairly  accurate  records  of  importation  and  domestic  production 
are  maintained.  The  Census  figures  for  the  value  of  the  product 
of  the  various  manufacturing  industries  are  too  inaccurate,  in  the 
form  in  which  they  are  presented,  to  be  acceptable  as  a  basis  for 
estimates  of  per  capita  consumption,  and  there  is  too  great  uncer- 
tainty as  to  the  amounts  added  to  the  manufacturers'  selling 
prices  in  the  course  of  the  marketing  processes  to  warrant  placing 
any  reliance  upon  estimates  of  total  retail  selling  value  or  total 
amounts  paid  by  consumers  for  these  products.  These  per  capita 
consumption  figures,  moreover,  are  gross  figures  including  many 
grades  and  qualities,  some  of  which  are  virtually  non-competing. 
Such  statistics  are  of  little  aid  in  making  a  careful  market  analysis. 
y—Instead  of  attempting  to  use  statistics  for  wealth,  income,  or 
/per  capita  consumption,  the  first  task  in  undertaking  a  statistical 
analysis  of  a  market  is  properly  to  determine  just  what  class  or 
j  classes  of  consumers  constitute  the  potential  market  and,  if  there 
1  are  varying  degrees  of  demand,  what  demand  may  be  expected 
I  from  each  class.  For  this,  personal  investigation  or  inquiry  may 
beHecessary.  The  next  step  is  to  ascertain  the  number  of  con- 
sumers of  each  class  in  each  sales  district.  From  these  two  sets 
of  statistics  the  total  potential  demand  for  each  district  under 
normal  conditions  can  be  estimated. 

These  figures  for  estimated  potential  demand,  when  compared 
with  past  sales  records,  show  in  which  districts  the  best  oppor- 
tunities exist  for  sales  development  and  serve  as  a  basis  for 
establishing  quotas  for  salesmen^  Ordinarily  the  comparison  of 
sales  records  with  estimated  potential  demand  shows  that  the 
degree  of  saturation  is  not  uniform  in  all  markets.  It  is  usually 
found  upon  investigation  that  a  higher  percentage  of  potential 
demand  has  been  realized  in  some  markets  than  in  others,  thus 
indicating  the  direction  in  which  expansion  may  most  readily 
take  place.  Due  allowances  for  these  differences  in  the  degree  of 
saturation  must  be  made,  of  course,  in  setting  up  quotas  by  means 
of  which  salesmen  are  to  be  rated.  A  district  in  which  only 
25  per  cent  of  the  potential  demand  has  been  obtained  offers  a 
much  easier  field  for  selling  than  a  district  in  which  there  is  a  high 
degree  of  saturation  but,  while  he  should  show  a  greater  per- 


SALES  AND  ADVERTISING  STATISTICS  1 83 

centage  increase,  the  salesman  in  the  former  district  cannot  be 
expected  to  reach  the  mark  of  the  salesman  in  the  second  district 
in  a  single  season. 

Another  factor  to  which  attention  may  be  given  in  analyzing  a 
market  for  some  products  is  the  percentage  of  distribution,  — 
that  is,  the  percentage  of  the  total  number  of  possible  retail  out- 
lets in  which  the  goods  in  question  are  sold.  A  manufacturer  of  a 
food  product  sold  in  retail  grocery  stores  generally  wishes  to 
induce  as  large  a  number  of  grocers  as  possible  in  each  district  to 
carry  his  product.  If  75  per  cent  of  the  retail  grocery  stores  are 
selling  the  article,  he  considers  that  he  has  75  per  cent  distribu- 
tion, without  reference,  of  course,  to  the  relative  volume  of  trade 
of  the  retailers. 

In  establishing  sales  quotas,  allowances  must  be  made  not  only 
for  differences  in  degree  of  saturation  and  percentages  of  distribu- 
tion but  also  for  differences  in  general  business  conditions.  From 
season  to  season  general  business  conditions  fluctuate  in  each  dis- 
trict. A  poor  cotton  crop  may  cut  down  the  normal  demand  in 
the  cotton  states  while  a  good  grain  crop  in  the  same  year  may 
cause  business  to  be  exceptionally  brisk  in  the  wheat  district. 
Hence  the  statistical  indices  of  business  conditions  in  each  district 
must  be  taken  into  account  in  comparing  salesmen's  records  with 
i   established  quotas. 

Sales  Reports  and  Records 

Market  analyses  are  valuable  not  only  for  indicatmg  districts 
which  are  underdeveloped  as  markets  but,  as  has  been  indicated, 
they  are  especially  useful  in  furnishing  standards  for  rating  sales- 
men. Yet  whether  or  not  an  analysis  of  the  market  is  made, 
salesmen's  reports  and  salesmen's  records  are  essential  to  proper 
sales  management  and  the  summaries  of  departmental  sales 
and  of  total  sales  provide  the  general  management  with  vital 
information. 

From  the  individual  reports  sent  in  daily  or  at  frequent  inter- 
vals, statistical  records  are  made  out  in  order  that  total  sales, 
departmental  sales,  and  the  sales  of  individual  salesmen  may  be 
compared  with  previous  records  and  with  established  standards. 


1 84  BUSINESS  STATISTICS 

The  exact  f  onn  of  the  sales  record  varies  according  to  the  require- 
ments of  each  individual  business  and  the  greater  the  number  of 
lines  of  merchandise  carried  the  more  detail  is  needed  in  the  sales 
record.  A  hardware  wholesaler,  for  example,  will  wish  to  have  the 
sales  records  of  his  salesmen  classified  into  at  least  half  a  dozen 
groups  of  articles  in  order  that  he  may  determine  whether  or  not 
each  salesman  is  developing  properly  the  sales  of  the  lines  yielding 
the  greatest  profit.  A  hardware  salesman  whose  sales  of  nails  are 
increasing  and  whose  sales  of  cutlery  are  falling  off  is  not  a 
promising  employee.  Likewise  the  wholesale  grocer  who  finds 
that  one  of  his  salesmen  is  good  at  seUing  sugar  but  poor  at  selling 
other  lines  has  discovered  a  weak  spot  in  his  salesforce. 

In  trades  where  the  salesmen  call  upon  the  same  customers  at 
repeated  intervals,  as  for  example  in  the  wholesale  businesses, 
customers'  records  are  usually  found  to  be  valuable.  The  most 
conmion  form  of  customers'  records  is  a  set  of  cards,  one  card  for 
each  customer,  on  which  are  recorded  the  orders  received  from 
each  customer.  Although  the  same  information  can  ordinarily 
be  obtained  from  the  ledgers,  the  separate  card  record  is  needed 
by  the  sales  manager.  By  examining  these  cards  the  sales  man- 
ager is  able  to  ascertain  which  customers,  if  any,  are  buying  less 
than  formerly  and  which  customers  have  ceased  to  buy  at  all.  It 
frequently  happens  that  customers  cut  down  their  purchases 
because  of  dissatisfaction  or  friction  which  can  easily  be  remedied 
once  it  is  known  but  which  may  never  be  detected  without  cus- 
tomers' records.  It  is  fully  as  important  to  keep  old  customers  as 
it  is  to  secure  new  customers.  Several  examples  of  the  utilization 
of  sales  and  customers'  records  are  given  in  the  sections  which 
follow. 

Advertising  Statistics 

The  subject  of  statistics  used  in  the  advertising  department  as 
guides  for  the  selection  of  mediums  and  for  checking  up  results 
is  covered  in  the  following  sections  and  it  is  not  necessary  to  add 
anything  to  what  is  stated  there. 


SALES  AND  ADVERTISING  STATISTICS  1 85 

Statistics  Used  in  Retail  Stores 

The  statistical  records  which  are  kept  in  retail  stores  are 
analogous  to  those  kept  in  other  mercantile  establishments,  but 
the  form  and  the  amount  of  detail  vary  greatly  according  to  the 
size  of  the  store  and  the  nature  of  the  business.  In  retail  busi- 
nesses, as  in  all  other  lines  of  business,  the  cost  of  keeping  the 
statistical  records  has  to  be  weighed  against  the  advantages  to 
be  gained  therefrom;  a  small  store  cannot  afford  to  use  as 
elaborate  a  system  as  a  large  store.  A  department  store,  for 
example,  can  keep  daily  records  of  its  sales  by  departments  and 
by  salespersons,  detailed  wage  statistics,  complete  delivery 
records,  purchase  and  stock  records,  and  an  elaborate  budget 
system.  In  a  small  grocery  store,  on  the  other  hand,  some  of  these 
records  must  be  dispensed  with.^  Even  in  the  smallest  retail 
store,  however,  there  are  some  records  which  are  essential  — 
a  record  of  the  sales  of  each  salesperson  and  either  a  stock  or  a 
purchase  record.  If  the  salesforce  expense  is  to  be  kept  at  a 
minimum,  the  work  of  each  salesperson  should  be  watched 
continually  by  means  of  accurate  sales  records. 

In  retail  stores  generally,  one  of  the  most  serious  causes  of  loss 
is  a  slow  stock-turn,  owing  to  over-buying  or  to  poor  buying,  and 
either  a  stock  record  or  a  purchase  record  is  needed  by  every 
retailer.  In  a  retail  shoe  store  it  is  ordinarily  possible  to  keep  a 
record  of  sales  and  stock  in  detail,  since  the  number  of  lines 
carried  in  a  single  store  is  not  great.^  In  a  retail  grocery  store  or 
in  a  retail  hardware  store,  on  the  other  hand,  there  are  hundreds 
of  different  articles  and  brands  which  are  sold  in  small  quantities; 
in  such  stores  a  continuous  stock  record  can  seldom  be  kept  with- 
out excessive  expense.    For  stores  of  this  latter  class  some  sort  of 

*  In  general,  it  may  be  said  that  in  retail  stores  customers'  records  are  kept  only 
for  advertising  or  mail  order  purposes,  not  as  statistical  records.  Individual  cus- 
tomers are  too  numerous,  their  individual  purchases  too  small,  and  the  independence 
of  their  demand  too  great,  to  make  it  worth  while  to  keep  any  customers'  records, 
aside  from  those  in  the  ledgers,  in  the  ordinary  retail  store. 

2  A  complete  system  of  stock  records  for  retail  shoe  stores  is  explained  in  Bulletin 
No.  7  of  the  Harvard  Bureau  of  Business  Research,  Harvard  System  of  Stock-keeping 
Jor  Shoe  Retailers. 


1 86  BUSINESS  STATISTICS 

purchase  record  seems  to  offer  the  best  means  of  checking  up  the 
rapidity  with  which  the  various  articles  move.  If  a  card  record  is 
kept  for  each  brand  of  merchandise  and  each  purchase  order  is 
properly  recorded,  the  retailer  can  easily  determine  which  brands 
are  the  '^  slow  movers  "  and  what  changes  in  his  buying  policy 
are  necessary  in  order  to  increase  his  stock-turn. 

Many  mercantile  businesses,  both  wholesale  and  retail,  and 
many  manufacturers  are  constantly  troubled  with  the  return  of 
goods  from  customers  to  whom  they  have  been  sold.  Nice  ques- 
tions of  business  policy  are  involved  in  handling  this  problem  of 
returns,  but  whatever  policy  is  pursued  it  is  important  to  have 
a  statistical  record  of  "  returns."  Frequently  "  returns " 
are  entered  upon  the  sales  records  of  salesmen  and  upon  cus- 
tomers' records,  in  order  to  provide  information  to  aid  in  placing 
the  responsibility  and  thus  in  determining  the  policy  of  the 
management. 

I.    Considerations  of  the  Market  ^ 

By  a.  W.  Shaw 

The  business  man  must  first  realize  the  intricacy  of  the  problems 
he  has  to  solve.  He  must  analyze  his  market.  Enough  has  been 
said  to  indicate  the  complexity  of  the  market  problem.  The  busi- 
ness man  faces  a  body  of  possible  purchasers,  widely  distributed 
geographically,  and  showing  wide  extremes  of  purchasing  power 
and  felt  needs.  The  effective  demand  of  the  individual  consumer 
depends  not  alone  upon  his  purchasing  power  but  also  upon  his 
needs,  conscious  or  latent,  resulting  from  his  education,  character, 
habits,  and  economic  and  social  environment.     The  market, 

l^therefore,  splits  up  into  economic  and  social  strata,  as  well  as 

y  into  geographic  sections. 

The  producer  cannot  disregard  the  geographic  distribution  of 
the  consuming  public.  He  may  be  able  to  sell  profitably  by  sales- 
men where  the  population  is  dense,  while  such  method  of  sale 
would  be  improfitable  in  a  region  where  there  is  a  sparse  popula- 
tion.   If  he  bases  a  judgment  upon  the  average  cost  of  selling  by 

*  A.  W.  Shaw,  Some  Problems  of  Market  Distribution,  pp.  100-117.  Reprinted 
by  pennission  of  Harvard  University  Press. 


SALES  AND  ADVERTISING  STATISTICS  1 87 

salesmen  for  the  whole  market,  he  may  easily  go  wrong,  since  the 
average  might  show  that  the  use  of  such  an  agency  was  on  the 
whole  profitable,  although  in  some  sections  entering  into  the  cal- 
culations the  use  of  salesmen  was  actually  improfitable.  Again, 
it  might  be  economical  for  the  distributor  to  establish  his  own 
branch  stores  in  the  denser  urban  centers,  while  in  the  sparsely 
populated  regions  he  could  most  profitably  distribute  his  product 
through  the  regular  channels. 

If,  then,  a  soimd  system  of  distribution  is  to  be  established,  the 
business  man  must  realize  that  each  distinct  geographic  section 
is  a  separate  problem.  The  whole  market  breaks  up  into  differing 
regions. 

Equally  important  is  a  realization  of  what  may  be  termed  the 
market  contour.  The  market,  for  the  purposes  of  the  distributor, 
is  not  a  level  plain.  It  is  composed  of  differing  economic  and 
social  strata.  Seldom  does  the  ordinary  business  man  appreciate 
the  market  contour  in  reference  to  his  product.  Yet  obviously 
the  success  of  the  producers  of  trade-marked  hats  depends  upon  a 
realization  of  this  element  of  market  contour.  The  distributor 
of  a  staple  hat  at  $3.00  appeals  to  different  economic  and  social 
strata,  faces  different  considerations,  and  finds  different  selling 
methods  necessary,  as  compared  with  distributors  selling  a 
$5.00  trade-marked  hat,  or  those  distributors  selling  $4.00  or 
$6.00  trade-marked  hats.  Differences  in  economic  and  social 
strata  to  be  reached  are  as  important  as  differences  in  geographic 
location  and  density,  if  a  sound  system  of  distribution  is  to  be 
worked  out. 

Take  the  distributor  who  seeks  to  map  out  a  selling  campaign 
for  a  Catholic  publication.  It  is  essential  that  he  take  into 
account  not  merely  the  geographic  distribution  of  the  Catholic 
population  in  the  United  States,  the  regions  where  it  is  relatively 
dense,  and  the  regions  where  it  constitutes  a  small  element  in  the 
population,  but  also  he  must  take  into  account  the  distribution 
of  that  population  through  the  economic  strata  of  society.  A 
method  of  distribution  successful  in  New  Orleans,  where  the 
Catholic  population  is  dense  and  spread  through  all  economic 
strata  of  society,  might  well  fail  if  applied  in  Maine,  where  the 


l88  BUSINESS  STATISTICS 

Catholic  population  is  relatively  sparse  and  found  mostly  in  the 
lower  economic  strata. 

A  careful  analysis  of  his  market,  then,  by  areas  and  by  strata, 
is  the  first  task  of  the  modem  distributor.        ""~~ 

Choice  of  Agencies  in  Distribution 

Nor  does  the  merchant-producer  ordinarily  realize  how  intri- 
cate is  his  problem  as  to  the  agency  or  combination  of  agencies 
that  will  be  most  efficient  in  reaching  his  market.  As  has  been 
suggested  above,  the  business  man  often  adopts  one  method  and 
becomes  an  advocate  of  it,  disregarding  entirely  other  methods. 
While  the  method  adopted  may  be  more  efficient  than  any  other 
single  method,  it  is  apparent  that  a  method  which  is  relatively 
efficient  in  reaching  one  area  may  be  inferior  to  another  method 
in  reaching  another  area.  And  so  a  system  of  distribution  which 
has  proved  very  effective  in  reaching  one  economic  stratum  may 
be  relatively  inefficient  when  employed  to  reach  a  different 
economic  stratum  in  society. 

The  problem,  then,  of  working  out  the  most  effective  combina- 
tion of  agencies  is  a  most  complicated  one.  Each  distinct  area 
and  economic  stratum  must  be  treated  as  a  separate  problem, 
and,  moreover,  the  economic  generalizations  embodied  in  the  law 
of  diminishing  returns  must  be  taken  into  account  in  choosing 
that  combination  of  selling  agencies  which  will  give,  in  the 
aggregate,  the  most  efficient  organization  of  the  market. 

Thus  the  distributor  may  find  as  he  extends  his  operations  in 
his  immediate  territory,  geographically,  that  his  selling  cost 
steadily  decreases,  but  that  when  he  further  extends  his  market 
•  the  selling  cost  increases.  He  may  find  that  in  more  distant  areas 
selling  by  salesmen  ceases  to  be  profitable,  and  there  he  will  per- 
haps establish  a  more  economical  system  of  selling  by  a  combina- 
tion of  salesmen  and  circular  letters.  That  is,  he  may  reduce  the 
number  of  visits  by  salesmen  by  one-half,  and  supplement  their 
efforts  by  a  series  of  circular  letters  or  more  personal  correspond- 
ence. In  even  more  distant  areas,  it  may  be  necessary  to  eliminate 
the  salesmen  entirely  and  to  sell  only  by  direct  advertising. 


SALES  AND  ADVERTISING  STATISTICS  1 89 

Perhaps  enough  has  been  said  above,  in  analyzing  the  functions 
of  the  middleman  and  the  extent  to  which  the  rise  of  functional 
middlemen  has  made  alternative  agencies  of  distribution  possible, 
to  free  us  from  the  necessity  of  here  pointing  out  at  length  how 
complicated  is  the  problem  presented  when  the  business  man 
balances  distribution  through  middlemen  against  direct  seUing 
through  salesmen  and  advertising. 

Attention  must  be  called,  however,  to  considerations  that  enter 
when  one  compares  the  use  of  salesmen  with  the  use  of  di£ferent 
forms  of  advertising.  The  business  man  will  often  judge  between 
different  selling  agencies  solely  upon  the  basis  of  the  direct  return 
over  a  short  period.  In  discussing  advertising  we  spoke  of  three 
classes  of  demand  aroused  by  seUing  efifort:  (i)  expressed  con- 
scious demand,  (2)  unexpressed  conscious  demand,  and  (3)  sub- 
conscious demand.  The  direct  and  immediate  return  from  selling 
efforts  depends  solely  on  expressed  conscious  demand.  But  the 
business  man  must  take  into  accoimt  the  unexpressed  conscious 
demand  and  the  subconscious  demand.  Suppose  a  smoking 
tobacco  is  advertised.  A  man  notices  the  advertisement,  reads 
it,  and  decides  that  at  some  future  time  he  will  try  it,  and  perhaps 
months  later  does  so.  This  is  not  reflected  in  the  direct  immediate 
returns,  yet  clearly  it  is  a  result  to  be  taken  into  account.  Or 
suppose  a  man  merely  notices  the  advertisement.  At  a  later  date 
when  purchasing  tobacco,  he  is  shown  the  advertised  brand  with 
other  brands.  The  advertised  brand  being  vaguely  familiar  to 
him  from  the  advertisement,  he  purchases  it  in  preference  to  the 
others.  Here,  too,  the  aroused  demand  would  be  of  a  degree 
not  reflected  in  direct  immediate  returns,  yet  of  value  to  the 
distributor. 

It  is  obvious,  then,  that  if  one  were  balancing  the  advantages 
of  selling  through  salesmen  against  selling  through  advertising  in 
whole  or  in  part,  he  should  consider  not  only  the  expressed  con- 
scious demand  reflected  in  the  direct  immediate  returns  but  also 
the  lesser  degrees  of  demand  which,  while  not  inamediately 
effective,  tend  to  render  subsequent  selling  easier. 

Thus  a  salesman  might  make  fifty  calls  at  an  expense  of  $100, 
and  ten  sales  might  result  from  his  efforts.    Or  for  the  same  $100, 


I90  BUSINESS  STATISTICS 

5000  pieces  of  direct  advertising  might  be  mailed,  resulting  per- 
haps in  only  eight  sales.  Or,  perhaps,  if  the  same  $100  were 
used  for  the  insertion  of  a  page  advertisement  in  100,000  of  the 
circulation  of  a  standard  magazine,  only  six  sales  would  result. 
Now  it  is  apparent  that  judging  by  the  direct  results,  the  sales- 
man is  the  most  efficient  agency  of  distribution,  the  direct  adver- 
tising next,  and  the  magazine  advertising  least  efficient.  But  the 
distributor  must  bear  in  mind  that  there  are  grades  of  demand 
which  do  not  become  effective  immediately,  and  must  take  into 
account  that  while  the  salesman  made  ten  sales  he  had  only  forty 
opportunities  to  create  these  lesser  grades  of  demand,  while  the 
direct  advertising  gave  4,992  opportunities  for  the  creation  of 
demand  falling  short  of  expression,  and  the  magazine  advertising, 
perhaps,  49,994  such  opportunities,  assuming  for  our  present 
purpose  that  the  advertisement  was  seen  in  one-half  the  copies 
by  one  person.  This  is  not  an  improbable  supposition  as  each 
copy  of  a  magazine  is  usually  read  by  several  persons. 

A  soimd  selling  policy,  then,  must  be  built  up  on  a  careful 
analysis  of  the  market  by  areas  and  strata,  and  upon  a  detailed 
study  of  the  proper  agency  or  combination  of  agencies  to  reach 
each  area  and  stratum,  taking  into  accoimt  always  the  economic 
generalizations  expressed  in  the  law  of  diminishing  returns.  It 
must  also  take  into  account  not  only  the  dii^ect  results  obtained 
from  the  use  of  one  or  the  other  agency  over  a  short  period,  but 
also  the  less  measurable  results  represented  by  the  unexpressed 
conscious  demand  and  subconscious  demand,  which  go  to  aid 
future  selling  campaigns. 

All  this  tends  rather  to  give  a  general  sense  of  direction  than  to 
serve  as  a  practical  and  tangible  method  of  handling  a  specific 
problem  of  distribution.  A  clear  grasp  of  the  problem  through  a 
careful  analysis  is  the  first  step  in  solving  difficulties.  To  sug- 
gest any  cure-all  or  even  any  panacea  for  the  existing  maladjust- 
ments in  distribution,  even  were  it  possible,  is  not  the  purpose  of 
this  paper.  The  very  complications  revealed  by  analysis  indicate 
the  inadequacy  of  any  single  remedy.  But  it  is  possible  to  face 
the  problem  of  remedy  as  well  as  of  diagnosis  in  a  scientific  spirit, 
—  to  introduce  what  may  be  termed  the  "  laboratory  method." 


SALES  AND  ADVERTISING  STATISTICS  191 

Laboratory  Study  of  Distribution 

The  crux  of  the  distribution  problem  is  the  proper  exercise  of 
the  selling  function.  The  business  man  must  convey  to  possible 
purchasers  through  one  agency  or  another  such  ideas  about  the 
product  as  will  create  a  maximum  demand  for  it.  This  is  the 
fundamental  aim,  whatever  the  agency  employed.  Hence  this 
is  the  point  where  a  scientific  study  of  distribution  must  first  be 
applied.  How  is  the  business  man  to  determine  what  ideas  are  to 
be  conveyed  to  the  possible  purchaser  and  what  form  of  expression 
is  best  adapted  to  such  conveyance  ? 

Here,  as  elsewhere  in  distribution,  the  ordinary  business  man  is 
today  working  by  rule  of  thumb.  He  guesses  at  the  suitable  ideas 
and  forms  of  expression,  and  gambles  on  his  guess.  On  the  basis 
of  his  a  priori  selection  of  ideas  fitted  to  build  up  a  demand  for  his 
product  and  of  a  form  of  expression  suited  to  convey  the  ideas 
effectively,  he  invests  tens  even  hundreds  of  thousands  of  dollars 
in  a  selling  campaign. 

The  more  able  business  men,  to  be  sure,  seek  to  determine  those 
facts  about  their  goods  that  will  attract  the  attention  of  the  pos- 
sible purchaser  and  awaken  in  him  the  desired  reaction,  that  is, 
a  desire  for  the  article.  They  study  in  a  general  way  the  points  of 
superiority  in  quality  and  service  possessed  by  their  products  as 
compared  with  other  goods  of  like  kind. 

They  also  seek  guides  as  to  the  form  in  which  the  ideas  should 
be  conveyed,  in  the  general  principles  of  style,  all  based  on  the 
fundamental  notion  of  conserving  the  prospective  purchaser's 
mental  energy  by  cutting  down  the  friction  of  communication. 
They  know,  for  instance,  that  they  should  use  short  familiar  words 
expressing  their  exact  shade  of  meaning;  that  they  should  give 
preference  to  figurative  language;  that  they  should  suggest  a 
concrete  image  only  after  the  materials  of  which  it  is  to  be  made 
are  conveyed;  that  they  should  avoid  abstractions  and  gen- 
eralizations where  possible;  that  when  they  are  suggesting  the 
reaction  desired  their  language  should  become  quick,  sharp,  and 
compelling. 

These  things  the  more  efficient  business  men  know  and  apply. 
But  all  this  is  a  priori.    The  need  is  for  a  method  of  practical  test 


192  BUSINESS  STATISTICS 

that  will  enable  us  to  try  out  selling  ideas  and  forms  of  expression, 
under  laboratory  conditions,  as  it  were,  before  the  investment  of 
thousands  and  hundreds  of  thousands  of  dollars  is  staked  on  the 
success  of  the  selling  campaign. 

Mention  has  been  made  of  the  annual  expenditure  of  not  less 
than  a  billion  dollars  in  advertising.  Unquestionably  an  extremely 
large  percentage  of  this  is  wasted.  This  means  not  merely  in- 
dividual loss,  but  social  loss.  It  is  a  diversion  of  capital  and 
productive  energy  into  unprofitable  channels. 

The  causes  of  this  waste  are  numerous.  The  commodity  in 
question  may  be  one  not  possessing  those  elements  of  quahty  and 
service  which  constitute  the  basis  for  a  demand  on  the  part  of  the 
consuming  public.  If  the  goods  advertised  are  not  adapted 
to  satisfy  a  need,  conscious  or  subconscious,  of  consumers,  the 
advertising  cannot  be  effective.  Attempting  to  sell  a  thing  that 
nobody  needs  is  wasted  effort. 

Again,  the  medium  used  for  the  communication  of  the  ideas 
about  the  goods  may  not  be  one  that  reaches  the  particular 
economic  or  social  stratum  in  which  possible  purchasers  of  the 
commodity  lie.  Hence  the  ideas  fail  to  create  a  demand  because 
they  do  not  reach  those  in  whom  a  latent  need  for  the  commodity 
exists. 

Another  important  cause  of  advertising  waste  lies  in  the  failure 
to  take  advantage  of  aroused  demand.  The  distributor  often 
fails  to  give  proper  attention  to  the  matter  of  the  physical  supply 
of  his  product.  There  results  a  considerable  leakage  in  demand 
from  the  inability  of  persons  in  whom  a  demand  has  been  created 
to  obtain  the  goods  at  the  time  when  desired. 

But  the  great  cause  of  waste  is  probably  the  fact  that  the 
ideas  about  the  goods,  or  the  form  in  which  those  ideas  are  con- 
veyed to  possible  purchasers,  prove  ill-adapted  to  secure  the 
desired  reaction,  and  thus  to  create  in  the  consumer  an  effective 
demand. 

If  we  can  apply  to  this  pressing  problem  of  advertising  waste 
methods  of  study  which  have  proven  efficient  in  other  fields,  the 
gain  is  clear.  The  engineer  does  not  choose  material  for  a  bridge 
by  building  a  bridge  of  the  material  and  waiting  to  see  whether 


SALES  AND  ADVERTISING  STATISTICS  1 93 

it  stands.    He  first  tests  the  material  in  the  laboratory.    That  is 
what  the  business  man  must  do. 

The  statistician  turns  in  his  problems  to  the  law  of  averages. 
He  is  familiar  with  what  are  termed  mass  phenomena.  He  knows 
that  he  can  learn  something  of  the  average  height  of  a  body  of 
people  by  studying  the  heights  in  a  group  of  a  few  thousands  of 
people  drawn  at  random  from  the  larger  body.  Provided  that 
the  smaller  group  is  so  selected  as  to  insure  that  it  is  typical  of  the 
larger  body,  and  provided  the  group  is  large  enough  to  render  the 
law  of  averages  applicable,  the  statistician  knows  when  he  has 
determined  the  average  height  of  the  smaller  group  that  it  will 
roughly  coincide  with  the  average  height  of  the  larger  group. 

This  method  of  study  can  be  applied  by  the  business  man  in 
testing  the  ideas  and  forms  of  expression  to  be  used  in  a  selling 
campaign.  In  direct  advertising,  the  mailing  of  selling  letters, 
circulars  or  catalogues  to  prospective  purchasers  to  draw  from 
them  an  order  for  goods  as  an  evidence  of  awakened  demand,  you 
have  a  stimulus  and  response  adapted  to  direct  statistical  meas- 
urement. The  number  of  responses  per  thousand  communica- 
tions can  be  determined.  Here  is  the  agency  that  the  business 
man  can  employ  in  testing,  under  what  are  equivalent  to  labora- 
tory conditions,  the  ideas  and  forms  of  expression  that  seem  to 
him  best  adapted  to  awaken  a  demand  for  his  product. 

Suppose  the  manufacturer  of  a  food  product  is  planning  a  cam- 
paign to  reach,  not  the  consumer,  but  the  grocers  of  the  coun- 
try. Now  the  whole  bodv  ol  dealers,  large  and  small,  handling 
groceries  numbers  something  like  250,000.  Let  the  distributor, 
after  working  out  ?«  set  of  ideas  and  forms  of  expression  which 
seem  to  him  likely  to  be  effective  in  arousing  the  desired  demand, 
test  this  material  by  mailing  it  to  say  1,000  grocers.  The  group 
selected  must  be  large  enough  to  give  typical  results  and  it  must 
be  so  selected  as  to  be  representative  in  character  of  the  whole 
body  of  grocers. 

Grantin.g  these  elements,  the  distributor  can  determine  the 
number  of  responses  from  the  1,000  grocers  to  whom  the  com- 
munication was  sent,  and  can  estimate  from  that  result  the  aver- 
age resp>onse  per  thousand  of  commimications  that  would  have 


194 


BUSINESS  STATISTICS 


been  obtained  if  the  same  ideas  in  the  same  form  of  expression  had 
been  conveyed  to  the  whole  body  of  250,000  dealers  in  groceries 
in  the  country.  He  can  then  test  by  means  of  direct  mailing  to 
another  group  of  i  ,000,  a  varying  set  of  ideas  or  varying  form  of 
expression.    And  so  on  with  other  modifications  of  the  selling 


Table  I.    Bankers'  Tests 

Minimum  Standard  =  20  p)er  M. 


Tests 

Mailings 

Material 
mailed! 

Date 

No.  of 
pieces 
mailed 

Total 

orders 

received 

No.  per 

Mr 

Date 

No.  of 
pieces 
mailed 

Total 
orders 
received 

No.  per 
M. 

1909 

1909 

Ai 

3/30 

500 

3 

6     . 

A2 

3/30 

500 

5 

10 

Bi 

8/13 

500 

6 

12 

B2 

9/13 

500 

3 

6 

0 

9/15 

500 

4 

8 

a 

9/15 

500 

3 

6 

D2 

9/15 
9/15 

453 
500 

6) 
18/ 

25  { 

9/27 

19,934 

360 

18 

E 

9/16 

500 

7 

14 

P 

9/21 
9/21 

500    , 
Soo 

24  1 
,12/ 

se{ 

11/23 

16,511 

589 

35 

G 

10/18 

I,OCX3 

> 

30 

11/28 
1910 

21,790 

643 

29-5 

H 

11/16 
1910 

500 

II 

"{ 

1/24 
1/24 

6,554 
16,039 

165) 
390/ 

24 

I 

4/1 1 

500 

"I 

12J 

.{ 

5/5 

6,810 

145  \ 
336/ 

25 

4/1 1 

500 

5/4 

12,154 

1  Where  the  same  letter  appears  with  different  exponents  under  "  material  mailed  "  it  indicates 
that  on  the  test  mailing  results  were  kept  separately  for  the  same  material  mailed  to  two  small  groups. 

material.  Thus  it  will  be  possible  to  determine  what  ideas,  in 
what  arrangement  and  in  what  form  of  expression,  are  most 
effective  to  arouse  the  desired  demand. 

That  the  plan  suggested  is  practical  is  indicated  by  the  results 
of  such  an  intensive  study  presented  in  Table  I.  Here  are  shown 
the  results  of  "  tests  "  and  the  results  of  complete  mailings.  The 
tests  here  covered  only  one  stratum  of  society,  a  mailing  Hst  of 


SALES  AND  ADVERTISING  STATISTICS  1 95 

bankers  being  used.  The  purpose  of  the  selling  material  mailed 
was  to  obtain  orders  for  certain  publications.  Various  forms  of 
"  copy  "  were  tested  by  mailing,  usually  to  500  names  on  the  list. 
Where  the  return  on  any  test  exceeded  the  minimum  standard  of 
twenty  orders  per  thousand  communications  the  material  was 
mailed  to  the  complete  list.  In  only  one  case  did  the  complete 
mailing  fail  to  show  an  average  return  per  thousand  communica- 
tions substantially  the  same  as  that  derived  from  the  test  mailing. 
In  the  case  of  Test  D^  mailed  September  15,  1909,  the  return  is 
clearly  out  of  proportion  to  the  results  from  the  mailing.  The 
same  material  mailed  on  the  same  date,  however  (Test  D^),  gives 
for  a  similar  small  group  a  return  much  closer  to  the  results 
obtained  from  the  final  mailing.  When  a  minimum  standard  as 
low  as  twenty  is  used,  and  the  test  group  numbers  only  500,  there 
is  danger  that  the  average  will  be  disturbed  as  by  one  individual 
sending  in  several  orders.  The  larger  the  test  group  the  more 
exact  an  index  will  it  give  as  to  the  results  which  will  be  obtained 
from  a  complete  mailing. 

This  method  of  studying  ideas  and  forms  of  expression  in  direct 
advertising  would  be  important,  even  though  its  usefulness  did 
not  extend  beyond  direct  advertising.  It  wotdd  permit  one  to 
guide  a  widely  extended  direct  advertising  campaign  by  an 
investigation  relatively  inexpensive. 

But  the  importance  of  the  method  described  does  not  end  with 
direct  advertising.  Remember  that  the  root  idea  is  the  same, 
whatever  the  agency  for  selling  employed.  Selling  is  accom- 
plished by  communicating  to  the  possible  purchaser  ideas  about 
the  goods  calculated  to  stimulate  in  him  a  desire  for  the  goods. 
These  ideas  may  be  communicated  through  middlemen,  salesmen, 
general  advertising  or  direct  advertising.  Since  the  ideas  are  the 
same,  whatever  the  agency  for  communication,  the  business  man 
can  determine  in  his  direct  selling  laboratory  what  ideas  and  in 
what  combination  are  the  most  effective  selling  material.  He  can 
then  carry  over  into  his  selling  by  other  agencies  the  knowledge 
there  obtained. 

Suppose  an  extensive  campaign  through  periodicals  is  under 
consideration.    The  distributor  contemplates  spending  perhaps 


196  BUSINESS  STATISTICS 

hundreds  of  thousands  of  dollars  upon  advertising  in  certain 
periodicals.  What  can  the  "  distribution  laboratory  "  do  to 
determine  the  ideas  to  be  conveyed  and  the  forms  of  expression 
to  be  used  to  create  the  desired  demand  ?  Now  the  circulation  of 
a  periodical  to  be  used  may  run  into  the  hundreds  of  thousands 
or  even  into  the  millions.  The  business  man  wishes  to  test  the 
response  that  will  result  from  the  communication  to  this  enor- 
mous body  of  subscribers  of  certain  ideas  expressed  in  certain 
forms.  Not  only  can  he  work  out  the  most  effective  ideas,  the 
most  effective  arrangement,  and  the  most  effective  form  of  expres- 
sion through  the  agency  of  direct  mailing,  but  he  can  even  test 
the  final  "  copy  "  itself,  just  as  it  will  appear  in  the  periodical,  by 
mailing  it  directly  to  relatively  small  groups. 

Moreover,  he  can  test  the  response  to  it  found  in  differing  strata 
of  society.  Ideas  adapted  to  build  up  a  demand  for  a  commodity 
in  one  economic  or  social  stratum  may  prove  ineffective  when 
dealing  with  another.  The  importance  of  this  method  lies  in  the 
fact  that  most  periodicals  circulate  within  certain  fairly  well- 
defined  economic  and  social  strata.  The  ideas  and  forms  of 
expression  that  are  most  effective  in  one  periodical  hence  may  be 
relatively  ineffective  if  used  in  another  that  reaches  a  different 
stratum. 

Equally  important  is  the  application  of  the  suggested  method 
of  study  to  selling  through  salesmen.  The  more  progressive  busi- 
ness men  today  train  the  salesmen  in  a  certain  basic  "  selling 
talk."  That  is,  certain  ideas,  arranged  in  a  certain  order  and 
expressed  in  certain  forms,  are  impressed  upon  them  as  likely  to 
build  up  a  demand  for  the  article  on  the  part  of  possible  pur- 
chasers. The  basic  ^'  selHng  talk  "  is  not,  of  course,  repeated 
parrotlike  by  the  salesman,  but  it  does  serve  as  a  foundation  for 
his  talks  to  possible  buyers. 

Here  again  the  laboratory  idea  can  be  applied.  The  whole 
structure  of  the  selling  talk  can  be  built  up  on  the  ideas,  order  of 
-arrangement,  and  forms  of  expression  established  as  the  most 
efl&cient  in  creating  demand  through  the  medium  of  direct 
advertising.  One  need  but  appreciate  the  fundamental  identity 
of  the  selling  function,  through  whatever  agency  exercised,  to 


SALES  AND  ADVERTISING  STATISTICS  I97 

realize  that  the  results  obtained  in  experiments  in  direct  advertis- 
ing can  be  carried  over  to  selling  by  salesmen. 

Note,  too,  that  the  general  principles,  upon  which  the  "  testing" 
method  depends,  apply  when  we  seek  to  study  the  possibilities  of 
the  whole  market  by  the  intensive  cultivation  of  one  section  of  it. 
A  localized  selling  campaign,  narrow  in  extent,  will  give  relatively 
exact  data  from  which  the  possibihties  of  a  nation-wide  campaign 
of  Hke  character  may  be  judged.  Obviously,  if  our  law  of  averages 
holds  good,  we  may  carry  over  the  results  obtained  in  one  section 
to  other  sections,  and  hence  at  small  cost  guide  a  widespread 
campaign. 

The  exact  data  that  can  be  obtained  through  such  "  testing  " 
methods  permit  a  more  scientific  consideration  of  the  decreasing 
returns  obtained  if  one  agency  is  used  beyond  a  certain  point. 
Hence  a  better  combination  of  agencies  is  possible,  with  a  view  to 
the  greatest  aggregate  efficiency. 

II.  Why  and  How  a  Manufacturer  Should  Make 
Trade  Investigations  ^ 

By  C.  C.  Parlin 

One  of  the  amazing  things  in  industry  is  the  fact  that  vast  sums 
of  money  are  being  risked  in  enterprises  undertaken  upon  guess- 
work. While  some  manufacturing  enterprises  have  been  started 
only  after  a  careful  study  of  conditions,  others  have  been  insti- 
tuted after  a  few  inquiries  and  upon  a  decision  to  take  the  chance. 

Much  of  this  attitude  is  a  legacy  of  the  past  when  conditions 
were  .essentially  different  from  today.  In  the  earlier  period  of  our 
manufacture  the  markets  were  clamoring  for  goods.  The  manu- 
facturer had  but  two  problems:  first,  to  make  the  goods,  and 
second,  to  get  them  within  reach  of  the  consumers. 

Today  the  supply  in  most  lines  has  caught  up  with  the  demand 
and  a  third  very  important  function  devolves  upon  the  manu- 
facturer ;  namely,  to  develop  his  markets.  This  function  involves 
first  of  all  a  thorough  knowledge  of  his  existing  markets  and  of  all 

1  Printers'  Ink,  October  22,  1914,  PP-  3-12,  74-80.  Reprinted  by  permission  of 
Printers'  Ink.     Several  charts  have  been  omitted. 


198  BUSINESS  STATISTICS 

those  influences  which  are  operating  to  affect  them.  It  seemed 
natural  enough  in  the  earlier  stages  of  industrial  development  for 
the  manufacturer  to  confine  his  attention  to  the  making  of  goods 
\  and  to  entrust  to  an  outside  sales  organization  the  second  function 
of  getting  the  goods  to  the  consumer.  It  is  still  advantageous  in 
many  Hnes  for  the  manufacturer  to  reach  the  retailer  through 
jobbing  connections,  but  no  manufacturer,  however  eflSicient  and 
honorable  the  middlemen  handling  his  product  are,  can  afford  to 
be  without  first-hand  knowledge  of  his  markets.  Every  manu- 
facturer should  know  where  his  goods  are  sold,  who  buys  them 
and  why  they  are  bought,  what  type  of  men  are  selling  his  goods 
to  consumers,  what  influences  are  affecting  them,  what  their 
sales  methods  and  sales  costs  are,  to  what  extent  they  are  real 
factors  in  making  sales  and  to  what  extent  they  are  only  order- 
takers. 

Every  manufacturer  should  know  whether  he  has  a  uniform 
distribution  or  whether  there  are  certain  sections  and  communi- 
ties within  sections  where  sales  are  subnormal;  many  manu- 
facturers reaching  the  retail  trade  through  middlemen  seem  to 
have  very  little  of  this  information.  Those  who  sell  through  a 
sales  organization  sometimes  do  not  know  what  jobbers  buy  their 
goods  or  what  the  geographical  distribution  of  their  goods  is. 
Those  selling  to  jobbers  have  some  knowledge  of  the  geographical 
distribution  of  the  goods,  but  often  have  Httle  information  as  to 
what  proportion  of  their  goods  goes  to  cities  and  what  to  rural 
trade.  They  know  little  in  regard  to  the  retailer  and  his  prob- 
lems. They  do  not  know  what  consumers  buy  goods  or  what 
influences  affect  the  consumers'  choice.  In  general,  these  manu- 
facturers know  only  what  the  jobbers  tell  them;  and  why  should 
the  jobbers  tell  them  much  ? 

Manufacturers  who  sell  part  or  all  of  their  goods  direct  have 
more  information,  but  this  often  reflects  merely  the  salesman's 
viewpoint  and  does  not  portray  the  entire  field. 

Besides  a  thorough  knowledge  of  existing  sales  conditions  the 
manufacturer  should  study  potential  markets,  and  how  they  can 
be  developed,  what  the  influences  of  new  sales  methods  are  and 
what  influence  new  methods  of  exploitation  would  have  on  the 


^ 


^ 


SALES  AND  ADVERTISING  STATISTICS  199 

industry,  what  new  uses  can  be  found  for  the  product,  what  detri- 
mental influences  are  at  work  and  how  they  can  be  checked  or 
removed,  how  retailers  can  be  best  persuaded  to  give  efficient 
cooperation  and  how  consumers  can  be  most  effectively  reached. 

To  say  that  knowledge  is  power  is  trite  but  it  is  true.  Knowl- 
edge is  the  foundation  of  modern  merchandising,  and  as  competi- 
tion grows  more  intense,  it  becomes  more  apparent  that  the 
manufacturer  must  know  in  order  to  succeed. 

But  a  manufacturer  says,  "  Why  have  a  research  department  ? 
I  have  thirty  salesmen.    If  I  want  to  know  anything  I  ask  them." 

To  this  query  there  are  two  obvious  answers:  First,  because  \ 
these  men  are  salesmen.  They  are  honest  and  efficient,  but  they 
have  a  salesman's  viewpoint  and  a  salesman's  prejudices.  Their 
opinion  is  of  great  value,  but  by  the  very  fact  of  their  specializa- 
tion in  salesmanship  they  are  handicapped  in  getting  an  impartial 
view  of  the  situation.  They  see  a  part  of  the  truth  too  clearly  to 
get  a  fair  vision  of  the  whole  truth.  Second,  because  the  function 
of  a  research  department  is  not  only  to  answer  questions  but  to  ^ 
discover  influences  that  are  escaping  the  attention  of  the  manu- 
facturer and  his  sales  organization.  It  is  only  natural  that  any 
organization  which  specializes  on  a  certain  phase  of  an  industry 
should  in  the  gaining  of  intensive  knowledge  of  that  phase  lose 
something  of  the  perspective  of  the  whole.  A  research  depart- 
ment is  therefore  needed  to  supplement  and  broaden  this  special- 
ized knowledge  with  pertinent  information  from  allied  fields. 

As  competition  in  business  has  grown  more  acute,  there  has 
been  a  greater  necessity  that  every  factor  should  be  understood 
and  every  danger  guarded  against  in  order  that  success  may  be 
attained.  Hence,  there  is  an  increasing  necessity  for  research 
departments  in  business  enterprises. 

The  manufacturer  gets  an  intensive  knowledge  of  those  phases 
of  his  business  with  which  he  comes  in  daily  contact.  But  fre- 
quently there  exist  other  phases  with  which  he  has  Httle  contact. 
He  therefore  has  little  knowledge  of  their  importance.  From  the 
very  fact  that  a  manufacturer  gives  intense  attention  to  certain 
phases  of  his  industry,  these  phases  tend  to  assume  undue  impor- 
tance in  his  mind  and  it  is  difficult  for  him  to  obtain  a  well- 


200  BUSINESS  STATISTICS 

balanced  view  of  the  field  unless  his  own  experience  is  supple- 
mented by  research  into  those  portions  of  the  work  which  are 
least  understood. 

^  For  example,  the  manufacturer  who  sells  exclusively  through 
jobbers  has  httle  opportunity  to  judge  of  his  possibilities  through 
direct  sales.  The  manufacturer  who  uses  no  national  publicity 
"usually  fails  to  see  the  possible  development  of  his  business 
through  national  advertising.  A  manufacturer,  particularly  one 
who  sells  through  indirect  channels,  often  has  Uttle  knowledge  of 
the  distribution  of  his  product  —  who  buys  the  goods,  why  certain 
lines  are  selected  and  others  rejected.  On  the  other  hand  a  manu- 
facturer who  does  have  considerable  knowledge  about  the  dis- 
tribution and  sale  of  his  own  Knes  may  not  be  conscious  of  some 
general  influence  operating  in  the  retail  and  jobbing  field  which 
may  greatly  affect  his  selling  problems.  Hence  as  a  result  of 
research  work  manufacturers  have  usually  obtained  suggestions 
of  value  and  sometimes  have  been  led  to  change  entirely  their 
selling  systems. 

A  certain  manufacturer  in  the  Central  West  was  interested 
primarily  in  breaking  into  the  New  York  markets;  research 
showed  him  that  totally  neglected  at  his  own  door  there  lay  a 
larger  market  easier  to  get  and  likely  to  prove  more  profitable 
than  the  coveted  New  York  market;  research  showed  another 
manufacturer  that  his  distribution  was  far  from  uniform,  another 
that  he  was  restricting  his  Kne  to  jobbers  when  the  possible  sale 
for  his  goods  was  almost  confined  to  those  stores  which  aimed  to 
buy  direct,  another  who  sold  only  direct  that  a  major  portion 
of  the  opportunities  in  his  field  could  be  best  reached  through 
jobbing  channels. 

Granting  the  value  of  research  work,  the  chief  problem  is,  How 
may  it  be  conducted  to  produce  results  commensurate  with  the 
expenditure  ? 

In  commercial  research  work  as  in  most  other  lines  of  intel- 
lectual endeavor,  the  man  is  more  important  than  the  method. 
Essentially,  the  thing  to  do  is  to  get  a  competent  man  and  give 
him  much  latitude  both  in  method  and  in  subject  matter;  for 
the  problems  in  each  industry  are  so  individual  and  so  complex 


SALES  AND  ADVERTISING  STATISTICS  20I 

that  no  satisfactory  formula  for  procedure  can  be  laid  down,  and 
much  must  be  left  to  the  initiative  of  the  man  conducting  the 
work. 

At  first  sight,  it  might  appear  that  the  problem  of  a  research 
department  is  to  answer  inquiries,  and  a  man  taking  charge  of  the 
work  is  likely  to  ask,  ^'  Exactly  what  problems  am  I  expected  to 
solve  ?  "  The  answering  of  inquiries  is  valuable  and  may  be  well 
worth  what  it  costs,  but  a  research  department,  in  order  to  attain 
its  greatest  usefulness,  must  go  considerably  beyond  the  answer- 
ing of  questions  and  perform  the  higher  function  of  formulating 
questions  which  ought  to  be  asked. 

It  might  appear  that  the  company  would  be  in  a  position  to 
state  exactly  what  information  would  be  of  value,  but  after  asking 
many  manufacturers  what  problems  they  desired  to  have  studied, 
I  am  satisfied  that  one  of  the  greatest  services  of  a  research  depart- 
ment is  to  ask  new  questions.  When  a  manufacturer  has  formu- 
lated in  his  mind  a  question  for  which  he  seeks  an  answer,  all  his 
experience,  reading  and  thinking  are  brought  to  bear  upon  its 
solution,  and  while  a  research  department  can  accumulate  data 
that  will  help  him  in  reaching  a  conclusion  upon  that  point,  it  can 
perform  a  more  valuable  service  if  it  can  discover  tendencies  of 
which  the  manufacturer  is  not  conscious  and  ask  him  questions 
which  will  lead  to  new  lines  of  thought. 

Research  work  should  not  only  be  dominated  by  honesty  of 
purpose,  but  it  should  be  conducted  from  the  student  standpoint 
of  truth  for  truth's  sake.  Lines  of  inquiry  that  appear  likely  to 
prove  of  practical  value  should,  of  course,  be  pursued.  But  that 
which  appears  academic  should  not  be  neglected,  for  it  frequently 
happens  that  what  appears  to  be  academic  turns  out  to  be  highly 
practical,  while  something  which  appears  likely  to  be  practical 
often  turns  out  to  have  little  value. 

It  is  probably  advantageous  for  a  research  worker  to  approach 
his  problem  without  special  knowledge  of  the  particular  industry 
to  be  studied.  A  man  who  has  had  several  years  of  experience  in 
any  given  industry  has  formed  such  definite  opinions  of  that 
industry  that  he  cannot  easily  formulate  well-balanced  judgments 
on  its  problems.   The  research  worker's  function,  in  some  respects, 


202  BUSINESS  STATISTICS 

is  like  that  of  the  juryman,  for  whom  one  of  the  requirements  is 
that  he  know  nothing  about  the  case. 

The  methods  to  be  applied  to  commercial  research  are  analo- 
gous to  those  used  in  science;  namely,  the  gathering  of  a  mass  of 
facts  and  then,  with  an  abundance  of  data  before  one,  proceeding 
cautiously  from  the  particular  to  the  general. 

Some  of  the  broader  aspects  which  should  be  borne  in  mind  in 
formulating  conclusions  may  be  suggested  here. 

First,  tendency  toward  concentration.  It  is  of  vital  impor- 
tance to  a  manufacturer  to  know  whether  the  industry  in  which 
he  is  operating  is  tending  toward  concentration,  and  if  so,  to 
what  extent  that  concentration  is  likely  to  be  carried. 

In  general,  industries  may  be  divided  into  two  classes:  those 
making  utilities  and  those  making  style  goods.  Utilities  comprise 
those  articles  which  are  bought  by  the  consumer  solely  on  the 
basis  of  quality  or  efficiency  for  the  price  and  without  thought 
of  their  pleasing  his  taste  or  fancy:  e.  g.,  agricultural  implements 
are  utilities.  They  are  judged  solely  on  the  basis  of  performance 
in  proportion  to  price.  What  mechanical  principle  is  employed 
and  whether  the  lines  of  the  machine  are  pleasing  to  the  eye  make 
little  difference  if  efficiency  be  there. 

Style  lines  are  those  in  which  the  consumer's  preference  is 
determined  by  qualities  other  than  utility  —  all  those  lines  which 
appeal  to  individual  tastes  and  fancies.  In  general  they  are  the 
lines  that  involve  the  element  of  adornment  and  display,  such 
as  clothing  of  all  kinds,  jewelry,  dress  accessories,  household 
furnishings  and  decoration. 

Many  lines  are  at  the  same  time  utilities  and  style  goods.  For 
example,  clothing  and  furniture  in  certain  grades  are  bought 
primarily  for  serviceable  qualities,  but  in  other  grades  must  me^t 
the  most  exacting  requirements  of  style.  In  automobiles,  the 
truck  is  a  utility;  i.  e.,  is  judged  on  its  ability  to  produce  wealth. 
The  pleasure  car,  on  the  contrary,  is  both  a  utility  and  a  style 
carriage.  In  addition  to  meeting  the  demand  for  mechanical 
efficiency  it  must  meet  the  style  demand  of  the  moment;  and 
these  style  demands  affect  not  merely  body  Hnes,  location  of 
doors,  and  other  appearance  features,  but  also  cover  equipment 


SALES  AND  ADVERTISING  STATISTICS  203 

and  choice  of  mechanical  principles.  If,  for  example,  a  purchaser 
in  choosing  between  a  "  six  "  and  a  "  four  "  is  swayed  by  motives 
other  than  those  of  efficiency  and  price,  if  he  buys  the  one  or  the 
other  to  have  the  same  kind  of  motor  as  his  friends,  or  makes  his 
choice  because  the  one  or  the  other  simply  pleases  him  the  best 
regardless  of  purely  economic  reasons,  the  sale  is  made  according 
to  the  laws  of  style  goods  rather  than  of  utilities. 

It  is  important  for  a  manufacturer  whose  line  falls  somewhere 
in  this  vast  intermediate  field  to  determine  to  what  extent  style 
influences  are  controlling  the  industry,  for  the  manufacturing 
and  sales  tendencies  in  style  lines  are  fimdamentally  different 
from  those  in  utilities. 

In  utility  lines,  theoretically,  a  single  concern,  if  it  excelled, 
would  secure  an  entire  monopoly;  for  if  a  manufacturer  so 
perfected  his  manufacturing  process  that  he  was  universally 
acknowledged  to  have  the  most  efficient  article  at  the  price, 
theoretically  everyone  would  buy  his  product.  Practically,  if  one 
manufacturer  can  attain  a  very  high  degree  of  efficiency  in  manu- 
facture, another  can  develop  near  enough  to  his  standard  to  be  a 
competitor;  and  practically,  there  is  a  value  in  a  name,  and  there 
is  a  difference  in  public  opinion.  Hence  it  seldom  happens  that  in 
any  line  where  there  is  no  protection  by  control  of  raw  material 
or  patents,  anyone  does  attain  an  absolute  monopoly.  However, 
in  these  lines  there  tends  to  be  concentration  down  to  a  very  small 
number  of  manufacturers,  unless  freight  conditions  affecting  raw 
materials  or  finished  product  necessitate  a  sectional  distribution 
of  plants. 

In  the  manufacture  of  utilities,  as  concentration  progresses,  it 
becomes  increasingly  difficult  for  a  new  firm  to  gain  a  foothold; 
for  ordinarily  the  new  manufacturer  has  to  pass  through  an 
unprofitable  period  before  he  attains  efficiency  enough  in  manu- 
facture to  hold  his  own  in  competition  with  monopoly.  In  these 
lines  where  the  economic  tendency  is  toward  concentration,  there 
is  no  place  for  the  small  manufacturer  unless  he  can  adapt  his 
product  to  meet  some  peculiar  local  need,  and  no  place  at  all  for 
the  middle-sized  producer.  The  manufacturer  is  likely  to  face 
the  alternative  of  growing  great  or  being  crowded  to  the  wall. 


X 


204  BUSINESS  STATISTICS 

In  style  lines,  on  the  other  hand,  people  buy  not  only  quality 
and  efficiency  but  also  an  intangible  something  which  by  its  dis- 
play represents  the  owner's  individuality.  Since  there  are  many 
types  of  individualities  there  must  be  a  considerable  number  of 
manufacturers  to  supply  the  individual  wishes.  In  the  manu- 
facture of  a  style  line,  whenever  a  manufacturer  gets  a  majority 
of  the  market  a  style  reaction  sets  in  against  him.  Thus  it  comes 
about  that  no  one  can  gain  and  permanently  hold  any  large  per 
cent  of  the  total  market.  Hence  there  are  bound  to  be  a  con- 
siderable number  of  producers,  and  their  relative  rank  is  Kkely  to 
vary  from  season  to  season  as  a  fickle  public  smiles  first  on  one, 
then  on  another.  In  these  lines  the  opportunity  for  the  small  and 
medium-sized  manufacturer  continues;  for  in  style  lines  there  are 
always  people  who  desire  something  unique  and  thus  furnish  a 
chance  for  the  specialty  manufacturer  with  a  distinctive  product 
to  maintain  his  existence  without  growing  great.  For  the  same 
reason  there  is  always  an  opportunity  in  the  manufacture  of 
style  lines  for  a  new  concern  to  gain  a  foothold  if  it  can  make  a 
successful  appeal  to  the  human  desire  for  display. 

Obviously,  then,  one  of  the  most  important  things  to  be  deter- 
mined in  any  business  is  the  extent  to  which  style  influences 
control  the  industry  and  the  extent  to  which  the  tendency  to  con- 
centration is  likely  to  proceed.  Upon  an  understanding  of  these 
problems  and  upon  the  direction  of  the  company's  activities  in 
harmony  with  the  tendency  of  the  industry  may  depend  the  very 
existence  of  the  firm. 

Second,  convenience  goods  or  shopping  lines.  If  the  manufac- 
turer produces  an  article  sold  to  the  consumer,  it  is  important  to 
know  to  what  extent  it  is  bought  by  men  and  to  what  extent 
bought  by  women,  for  men  and  women  purchase  through  different 
motives. 

/  A  man  ordinarily  buys  either  at  (i)  the  most  convenient  place, 
(2)  by  impulse,  (3)  in  an  accustomed  place,  or  (4)  by  brand.  He 
*Hoes  not  compare  values  and  there  is  little  tendency  for  his  trade 
to  be  concentrated  in  shopping  centers  or  in  large  stores.  In 
general,  men's  trade  is  held  back  in  the  suburban  places  and 
remains  scattered  in  a  multitude  of  small  establishments. 


SALES  AND  ADVERTISING  STATISTICS  205 

Women's  trade,  on  the  contrary,  is  of  two  distinct  kinds:  (i) 
(  convenience  goods  and  (2)  shopping  lines. 

Convenience  goods  comprise  notions,  cheap  cottons,  and,  in 
^  general,  the  lower  end  of  women's  purchases. 

Shopping  lines,  in  general,  comprise  the  upper  end  of  women's 
purchases,  such  as  cloaks  and  suits,  draperies,  carpets,  millinery. 
In  the  purchase  of  convenience  goods  the  woman  ordinarily  buys 
on  the  same  motives  as  the  man:  that  is,  at  the  most  convenient 
place,  or  on  impulse,  or  sends  the  children  to  an  accustomed 
store,  or  orders  by  brand.  These  lines,  like  the  men's,  find  their 
sale  in  a  multitude  of  suburban  shops  or  crossroad  stores  and  the 
manufacturer  who  would  sell  these  lines  must  have  the  assistance 
of  the  jobber. 

In  the  purchase  of  shopping  lines,  on  the  other  hand,  the  woman 
does  definitely  want  to  compare  values  (apparently  in  three 
stores)  and  the  department  store,  which  is  organized  to  furnish 
facilities  for  women's  shopping,  tends  to  get  the  great  bulk  of  this 
trade.  Hence  the  trade  in  shopping  lines  is  sharply  concen- 
trated in  a  comparatively  small  number  of  shopping  centers  and 
in  a  few  stores  within  those  centers. 

It  is  of  prime  importance  to  a  manufacturer  to  determine  in 
which  classification  his  goods  fall  and  to  what  extent  either  shop- 
ping or  convenience  buying  is  the  prevailing  motive.  Upon  this 
depends  his  method  of  sale.  If  he  has  a  men's  line  or  a  conven- 
ience line,  his  distribution  is  widely  scattered  and  the  multitude 
of  small  merchants  handling  his  wares  prefer  to  buy  of  the  jobber. 
Such  a  manufacturer  therefore  should  not  push  his  direct  sales 
methods  farther  than  is  consistent  with  a  jobbing  policy.  In 
some  lines  he  will  find  it  advantageous  to  supplement  his  jobber 
program  by  selling  direct  to  those  large  stores  to  which  he  may 
sell  without  jeopardizing  his  jobber  connections.  If,  on  the  con- 
trary, he  has  a  shopping  line  of  any  considerable  volume,  the 
direct  sales  method  will  be  found  best  adapted  to  his  needs;  for 
the  sale  opportunities  are  confined  to  large  stores,  and,  in  general, 
large  merchants  prefer  to  buy  direct.  A  clear  understanding  of 
such  conditions  is  often  necessary  to  determine  the  foundation 
principles  of  a  selling  system. 


L 


206  BUSINESS  STATISTICS 

^    Third^scope  of  the  market. 

ySuch  a  retail  investigation  will  need  to  be  geographically  exten- 
/sive  because  the  various  sections  of  the  country  differ  materially 

I  in  buying  power  and  in  their  attitudes  toward  various  types  of 
merchandising.  Within  each  section  considerable  variation  will 
be  found  in  cities  of  different  size  and  in  cities  that  represent 
different  types.  For  example,  a  residential  city  will  ordinarily 
have  more  per  capita  buying  power  than  an  industrial  city.  A 
city  with  a  large  German  population  is  likely  to  have  a  conserva- 
tive per  capita  expenditure  in  department-store  Hues.  A  capital 
city  tends  to  be  subnormal  in  concentrated  trade.  A  city  in 
which  wealth  is  concentrated  in  a  few  hands  may  show  low  per 
capita  expenditures,  while  a  city  with  wealth  widely  distributed 
will  be  found  to  be  above  the  average.  In  general,  retail  and 
jobbing  figures  are  merely  the  measure  of  human  wants  and 
economic  possibilities,  and  when  once  the  fundamental  principles 
have  been  ascertained  and  the  extent  to  which  sectional,  racial, 
industrial  and  climatic  conditions  modify  these  fundamental 
tendencies  is  understood,  one  may  estimate  with  a  fair  degree  of 
accuracy  the  probable  market  for  a  given  section. 

In  estimating  markets  it  should  always  be  borne  in  mind  that 
the  potential  market  may  be  very  different  from  the  existing 
market.  An  industry  which  does  not  employ  advertising  may 
seem  to  have  a  small  market,  while  if  consumers  were  better 
informed  the  market  might  be  much  enlarged.  Or  an  industry 
which  sells  direct  when  it  should  use  jobbers,  or  vice  versa,  may 
fall  materially  short  of  satisfying  its  potential  market.  Hence, 
the  potential  market,  though  less  tangible  and  therefore  more 
difficult  of  study,  offers  the  more  important  field  for  research 
work. 

.      Fourth,  seasonal  sales. 

The  manufacturer  usually  is  conscious  of  the  extent  to  which 
his  sales  are  affected  by  seasons,  but  the  graphing  of  the  seasonal 
curves  often  proves  interesting  and  of  value  in  planning  sales 
efforts.  For  example,  a  graph  of  the  automobile  production  and 
sales  indicates  two  very  unequal  sales  seasons;  a  major  one  in  the 
spring  and  a  minor  one  in  the  fall,  with  a  style  clean-up  in  mid- 


SALES  AND  ADVERTISING  STATISTICS  207 

summer  and  a  stock  clean-up  in  the  late  fall.    A  graph  of  the 
department-store  sales  indicates  two  nearly  equal  sales  seasons, 
the  graph  tending  to  be  symmetrical  except  for  the  influence  of 
the  holiday  trade. 
,r-  Fifth,  fimdamental  tendencies  in  the  trade. 

The  scope  of  a  commercial-research  department  is  to  ascertain 
that  which  is  fundamental  rather  than  to  give  attention  to  the 
ephemeral. 

In  many  industries  it  is  necessary  to  forecast  changes  in  fashion, 
and  the  value  of  this  work  is  by  no  means  minimized,  but  such 
work  is  so  distinct  from  that  of  a  commercial-research  department 
that  it  belongs  to  a  distinct  department. 

III.  Finding  the  Facts  that  Count  ^ 

By  J.  G.  Fredericks  and  F.  M.  Feiker 

From  a  sixth-floor  window  a  young  advertising  man  looked  out 
across  the  steam  puffs  and  long  roof  lines  of  a  four-hundred-acre 
plant.  He  was  trying  to  match  up  the  theories  his  chief  was 
setting  forth  with  the  visible  power  Spread  out  before  him.  The 
latter  had  just  told  him  that  the  works  would  keep  on  running 
even  though  all  advertising  stopped. 

"  Momentum,"  the  older  man  explained  comfortably,  "  carries 
a  big  business  through  dull  seasons.  Our  prestige,  the  fact  that 
we  have  the  largest  organization,  the  biggest  factory  and  the 
longest  line,  makes  this  business  go  —  and  grow.'' 

The  advertising  man  doubted.  It  did  not  seem  logical  that 
sales  in  the  long  run  could  be  built  on  a  passive,  neutral  basis. 
Experience  urged  that  any  business-getting  plan  or  program 
should  be  grounded  on  facts  and  a  knowledge  of  conditions  as 
specific  and  certain  as  that  obtaining  in  the  research  laboratory 
he  could  see  down  the  factory  street. 

"  Our  sales  have  always  fallen  to  thirty  per  cent  of  normal, 
during  July  and  August,"  the  manager  of  another  business  — 
this  one  a  large,  midwestern  retail  store  —  assured  his  new 
merchandise  man  when  the  latter  took  alarm  at  a  sudden  slump 

*  System,  August,  1912,  pp.  115-124,    Reprinted  by  permission  of  System. 


2o8  BUSINESS  STATISTICS 

in  receipts.  "  Our  trade  goes  off  to  the  country,  and  we  simply 
have  to  accept  the  inevitable.  The  dull  season  means  that  we 
have  to  exert  tremendous  pressure  during  the  fall,  winter  and 
spring  to  recoup  the  losses.  But  we've  never  failed  to  restore  the 
average  yet." 

Was  the  factory  executive  right  ?  Was  the  head  of  the  depart- 
ment store  sure  of  his  ground  ?  Are  momentum  and  prestige, 
trade  standards  and  customs,  dull  season  and  vagrant  popula- 
tions to  be  accepted  as  inevitable  and  unchangeable  factors  in 
distribution  and  merchandising  ?  Are  hostile  conditions  or  cir- 
cumstances felt  rather  than  known  certainly,  to  be  allowed  to 
limit  production  programs  and  marketing  plans  ?  Or  are  these 
oppressive  conditions  to  be  examined,  dissected,  remedied  — 
and,  perhaps,  utilized  ? 

Constructive  business  answers,  no.  That  young  advertising 
man,  going  back  to  his  old  place  the  other  day,  found  a  new  chief 
busy  with  charts,  diagrams  and  plans.  He  found  him  checking 
returns  in  different  territories  against  quotas  fixed  by  scientific 
study  and  investigation.  He  saw  page  after  page  of  detail  figures 
showing  how  much  each  district  ought  to  yield  and  how  much  it 
actually  had  produced.  He  found  the  manager  digging  out  the 
reasons  why  returns  had  not  come  up  to  expectations. 

Business  after  business  is  probing  into  its  own  past  searching 
for  the  soHd  basis  of  fact  upon  which  to  base  future  growth.  New 
policies  are  forming.  The  progressive  grocer  no  longer  guesses 
which  goods  make  his  profits  for  him.  He  gets  figures  and  knows. 
The  advertising  manufacturer  or  wholesaler  no  longer  contracts 
for  white  space  to  be  filled  with  mere  publicity  announcements. 
The  retail  merchant  with  the  new  point  of  view  doesn't  take  the 
falling  off  in  his  summer  trade  for  granted;  he  analyzes,  gets  at 
the  facts,  lays  plans  to  counteract  his  decrease  in  volume. 

When  a  new  manager  took  charge  of  this  same  department 
store  he  challenged  that  summer  slump.  He  was  not  content  to 
see  normal  running  expenses  go  hand  in  hand  with  an  excessive 
drop  in  income.  As  he  went  about  the  store  he  studied  the  situa- 
tion. Then  he  called  a  conference  of  all  the  buyers  and  put  it 
before  them. 


SALES  AND  ADVERTISING  STATISTICS  209 

"  But  we  expect  that,"  they  countered  with  the  same  old 
excuse.    "  Our  best  trade  leaves  the  city  about  June  20th." 

"  How  many  people  in  this  town  ?  "  the  manager  demanded. 

''  About  750,000." 

"  Phone  to  some  railroad  traffic  man  and  find  out  how  many  go 
away,"  he  ordered. 

Presently  the  answer  came: 

"  About  85,000." 

"  Is  it  true,"  the  manager  asked,  "  that  our  business  success  is 
bound  up  in  85,000  people,  less  than  one-eighth  of  the  population 
of  this  city  ?  What  about  the  folk  who  stay  at  home  ?  What 
about  the  visitors  who  flock  to  town  during  the  summer  months  ? 
Can  we  afford  to  let  a  business  rest  on  such  an  insecure  basis  ? 
Let's  find  out  where  we  stand,  and  why  we  can't  move  out  of  our 
tracks." 

The  hunt  for  facts  began.  It  was  a  big  store  with  eleven  motor 
delivery  routes.  These  routes  were  plotted  on  a  city  map.  The 
daily  delivery  sheets  for  a  year  back  were  examined,  and  the 
number  of  packages  on  each  route  tabulated  and  posted  in  that 
district.  Study  of  the  complete  map  disclosed  the  amazing  fact 
that  except  in  July  and  August  three-fourths  of  the  store's  sales 
were  made  in  an  area  of  less  than  one-fifth  the  total  area  of  the 
eleven  routes.  There  was  no  abnormal  summer  loss  outside 
of  this  one  very  productive  district.  But  here  in  this  area  of 
fat  incomes,  and  social  prominence,  July  and  August  dehv- 
eries  fell  off  nearly  40  per  cent  from  the  normal  level  of  other 
months. 

An  analysis  of  the  store  advertising,  both  newspaper  and  cir- 
cular, showed  that  the  appeal  had  been  directed  exclusively  to 
the  classes  which  maintained  charge  accounts.  A  "  quaHty  " 
trade  had  been  the  conscious  purpose:  it  had  been  attained  with 
a  vengeance.  The  wage-earning  groups,  the  great  mass  of  people 
who  buy  moderate-priced  goods  had  been  so  impressed  with  the 
idea  that  this  was  a  high-priced  store  that  they  were  no  longer 
reading  the  store's  advertisements  in  the  daily  papers.  Long 
experience  had  taught  them  that  they  could  not  afford  to  shop 
there. 


2IO  BUSINESS  STATISTICS 

*'^  It  was  determined  to  reach  these  moderate-price  groups.  Their 
habit  of  not  reading  the  store's  advertisements  made  necessary 
I  some  unusual  method  of  approach.  It  took  the  form  of  a  large 
circular,  distributed  from  house  to  house,  featuring  the  merchan- 
dise these  prospects  were  buying  at  slightly  lower  prices  than 
/   they  had  been  paying  elsewhere. 

What  these  goods  were — what  prices  people  wanted  to  pay  — 
what  values  they  expected  —  this  was  made  the  subject  of  serious 
study.  The  buyers,  good  judges  *of  the  cheaper  qualities,  reen- 
forced  their  knowledge  by  talks  with  their  clerks  about  sales 
lost  because  prices  were  high.  They  even  had  these  clerks  can- 
vass the  recent  purchases,  parricularly  the  bargains,  of  their 
friends  and  neighbors.  In  this  way  the  buying  of  the  trial  stock 
was  brought  into  touch  with  the  needs  of  the  less  productive 
districts. 

"  Examine  these  bargains  at  our  store:  watch  our  newspaper 
advertisements  "  was  the  slogan  of  the  circular.  The  groups 
aimed  at  did  both.  Sales  showed  an  immediate  increase.  The 
campaign  was  begun  in  July.  For  that  month,  instead  of  the 
usual  loss,  the  total  sales  were  larger  than  for  May  —  a  condition 
never  before  occurring  in  that  store's  history.  In  August  the  first 
attempt  was  made  to  reach  the  same  people  through  newspaper 
advertising.  Care  was  used  to  feature  goods  and  prices  that 
would  appeal.  The  results  showed  that  the  circular  had  been 
successful  in  educating  the  new  group  to  read  the  store's  news- 
paper advertising  as  well  as  to  come  in  and  examine  the  bargains 
exploited. 

Probing  for  facts  upon  which  to  base  new  business  or  reenforce 
old  connections  is  a  poHcy  that  may  be  applied  in  every  business. 
Initiative,  personality  and  executive  ability  have  carried  many  an 
undertaking  to  success.  But  no  matter  what  the  size  or  character 
of  the  concern,  the  search  for  vital  statistics  must  sooner  or  later 
be  taken  up  if  the  business  is  to  continue  and  not  lose  ground. 

To  visit  factories  in  New  England,  department  stores  in  Mis- 
souri and  Canada,  insurance  offices  in  Illinois,  real  estate  offices 
in  New  York,  to  analyze  incident  after  incident  where  this  poUcy 
of  building  on  facts  has  been  the  making  of  a  business,  would 


SALES  AND  ADVERTISING  STATISTICS  211 

mean  the  cataloguing  of  so  many  prosperous  concerns.  Once  a 
merchant  or  manufacturer  sees  such  an  inquiry  under  way,  he 
accepts  the  advantages  as  self-evident  and  finds  that  the  working 
out  of  a  program  of  investigation  and  analysis  is  a  problem  no  less 
interesting  than  the  test  of  the  policy  itself. 

Business  men  with  the  new  point  of  view  do  not  take  anything 
for  granted.  They  look  behind  results  for  the  hidden  causes.  As 
often  as  not  they  learn  that  decreasing  sales  are  due,  not  to  short 
crops  or  industrial  slackness,  but  to  fundamental  changes  in 
marketing  conditions  or  changes  in  consumer  demands  which 
have  been  accepted  as  fixed  and  stable  for  a  score  of  years. 

Old  channels  of  distribution,  they  discover,  have  been  broken 
down  in  many  lines.  The  jobbing  house  has  been  eliminated 
as  a  factor  in  many  territories,  while  in  other  fields,  for  other 
products,  the  wholesale  units  have  been  multiplied  and  their 
individual  size  reduced.  The  consumer  demand  for  certain  com- 
modities has  almost  vanished  in  fields  formerly  productive. 

After  gathering  and  classifying  his  facts,  the  manager  fre- 
quently discovers  that  to  maintain  his  accustomed  volume  of 
sales,  he  must  either  transfer  his  attention  to  other  groups  or 
classes  of  consumers  or  develop  brand  new  uses  or  appeals  for  his 
erstwhile  staple  goods.  Occasionally  too,  searching  inquiry 
uncovers  a  general  loss  of  confidence  due  to  lowered  ideals  or 
negligence  in  the  handling  of  orders  and  customers  which  has 
been  wholly  unknown  to  the  head  of  the  business.  Or  any  one  of 
a  hundred  other  special  conditions  or  circumstances  may  take 
threatening  shape  in  the  department  of  his  business  where  he  felt 
himself  more  secure.  The  main  point  to  remember  is  that  analysis 
of  the  chief  functions  of  any  business  and  the  machinery  and 
organization  which  serve  those  functions  rarely  fails  to  pay  its  cost 
over  and  over  again. 

How  conditions  may  be  analyzed  and  the  facts  thus  sifted  be 
utilized  is  illustrated  by  the  recent  experience  of  one  great  indus- 
try. By  reason  of  its  size  and  unquestioned  leadership,  perhaps, 
it  had  developed  a  blind  side  in  its  outlook  on  the  selling  field. 
The  momentum  gathered  in  half  a  century  carried  it  along  at 
about  the  usual  rate  of  progress.    In  view  of  the  general  slackness 


212  BUSINESS  STATISTICS 

of  the  whole  industry,  it  was  agreed  that  the  company  was  more 
than  "  holding  its  own." 

The  president,  however,  had  noted  various  indications  which  he 
felt  were  more  than  symptoms  of  a  temporary  stagnation.  From 
his  reports,  he  gleaned  here  and  there  figures  which  suggested  a 
slow  but  decided  downward  movement  in  the  volume  of  sales  by 
territories.  The  growth  of  the  country  was  holding  the  total  up 
to  the  normal  mark,  but  there  was  evident  a  sluggishness  which 
could  not  be  explained  by  lack  of  quality  or  value  in  the  goods 
or  lack  of  energy  in  the  selling  force  or  in  the  company's  adver- 
tising, general  or  direct.    The  whole  trade  seemed  sick. 

Called  into  council  by  the  president,  the  directors  made  light 
of  the  situation.  At  each  succeeding  meeting,  however,  as  they 
faced  the  accumulating  evidence  of  lost  ground  they  began  to 
share  his  doubts.  As  they  failed  to  lay  finger  on  the  reasons 
for  the  recession,  their  confidence  in  their  own  judgment  weak- 
ened. They  felt  the  adverse  undercurrent,  but  lacked  definite 
information  either  to  reassure  them  or  to  confirm  their  fears. 

Finally,  the  president  brought  matters  to  a  focus. 

"  It's  time,"  he  said,  "  to  stop  this  traveling  around  in  circles. 
We've  got  to  quit  guessing  and  go  after  the  facts.  We  need  a 
thorough  investigation  into  all  the  conditions  surrounding  our 
business  and  the  tendencies  which  seem  to  be  turning  the  trade 
upside  down." 

One  of  the  directors  objected.  Hadn't  the  auditor  smothered 
them  with  figures  showing  forty  different  conditions  which,  in  the 
end,  turned  out  to  be  negligible  so  far  as  their  influence  on  sales 
went  ? 

"  Yes,"  the  president  agreed,  "  and  that  is  why  we  are  thinking 
in  circles.  We  have  lived  too  close  to  this  business,  and  fed  our- 
selves too  much  on  mere  office  statistics.  We  need  perspective. 
We  need  to  see  this  business  in  relation  to  other  lines  of  trade  and 
general  consumer  conditions.  We  have  been  explaining  the 
fluctuations  of  our  trade  by  all  kinds  of  rough-and-ready  reasons 
—  the  effect  of  consolidations,  tariff  tinkering,  the  political  situa- 
tion, and  so  on.  But  we  haven't  one  shred  of  scientific  fact  to 
back  up  our  explanations. 


SALES  AND  ADVERTISING  STATISTICS  21 3 

"  We  have  got  to  dig  into  this  thing  hard  and  deep.  There  are 
several  vital  things  we  do  not  know  about  this  business.  We 
know  who  our  jobbers  are  and  the  names  of  our  larger  dealers. 
We  write  to  many  of  them  every  day  and  our  salesmen  visit  them 
regularly.  But  we  don't  know  who  buys  our  products  for  use  or 
what  kind  of  men  and  women  they  must  make  good  for. 

"  Years  ago  we  put  our  trade  in  the  hands  of  the  jobbers. 
Retailing  has  changed  but  we  don't  know  how  it  has  changed  or 
how  the  changes  have  afifected  our  products.  Consumer  demand 
has  changed :  we  need  to  know  why  and  how.  I  propose,  there- 
fore, that  we  make  a  broad,  thorough,  analytical  investigation 
into  all  these  things  and  try  to  reduce  the  information  to  figures 
and  charts  and  reports  which  we  all  can  understand.  Then  we'll 
be  in  some  sort  of  shape  to  save  the  business." 

The  work  began  next  day.  First  a  conference  of  all  the  manu- 
facturing executives  was  called.  In  company  with  the  president, 
they  sized  up  the  production  situation  from  every  angle.  They 
examined  the  goods  from  the  point  of  view  of  salability,  value, 
efficiency,  safety  in  use.  But  a  searching  analysis  of  trade  reports , 
salesmen's  complaints,  the  results  of  technical  investigation  and 
comparative  tests  established  nothing  except  that  the  goods  were 
sound.  Then  followed  a  series  of  conferences  on  the  quality  and 
efficiency  of  products  as  compared  with  competing  lines.  Every 
consumer's  complaint  received  in  ten  years  was  gone  over  in 
detail.  But  no  flaw  in  the  sales  value  of  the  goods  developed. 
Wherever  the  sick  nerve  was,  it  could  not  be  found  in  the  factory. 

Interest  centered  next  on  the  sales  organization  and  the  funda- 
mental selling  situation.  A  study  of  the  whole  industry  was  first 
made.  Graphic  charts  presented  the  volume  of  business  of  the 
six  leading  companies.  They  pointed  back  forty  years.  Getting 
the  sales  figures  of  two  of  these  companies  was  easy;  the  other 
three  guarded  their  statistics  jealously,  but  sufficient  data  were 
secured  to  make  the  final  estimate  one  very  close  to  the  actual 
figures.  This  sales  chart  showed  conclusively  that  there  had  been 
no  decrease  in  output  which  other  firms  had  not  felt  more  keenly; 
while  the  ratio  of  increase  was  always  greater  for  the  company 
than  for  the  other  concerns.    In  a  word,  not  one  firm,  but  the 


214  BUSINESS  STATISTICS 

whole  industry,  was  suffering  the  same  sickness,  whatever  that 
might  be. 

For  the  moment,  therefore,  the  investigation  did  not  take  up 
the  individual  efficiency  of  the  sales  staff  and  organization. 
Instead,  it  followed  the  lead  pointed  by  the  sales  chart  for  the 
whole  industry,  and  tackled  the  broader  questions  of  the  con- 
sumer's attitude  towards  the  line,  his  need  of  such  products  and 
the  general  distributive  situation. 

Here  a  careful  investigation  was  necessary.  The  information 
likely  to  be  found  useful  and  suggestive  was  classified  and  the 
inquiry  was  pushed  in  all  parts  of  the  country.  Six  weeks  later 
this  information,  tabulated  and  reduced  to  graphic  charts,  was 
laid  before  the  executive  board.  It  supplied  clear  and  unmis- 
takable reasons  for  the  condition  which  they  had  felt,  but  had 
failed  to  analyze  and  offer  data  comparing  the  current  trend  of 
the  industry  with  the  movement  in  other  lines. 

In  a  nutshell,  the  peculiar  situation  in  the  trade  hinged  on 
three  separate  developments:  The  first  and  by  far  the  most 
important  was  the  movement  of  population  to  the  cities  and  the 
decrease  of  wild  and  uncultivated  land.  When  a  man  moved  in 
from  the  country  to  take  a  job  in  a  store  or  factory,  his  use  of  the 
company's  products  virtually  ceased. 

The  second  development  was  the  passing  of  control  of  distribu- 
tion from  the  hands  of  the  jobbers  in  the  central  markets  and  the 
multiplication  of  smaller  wholesale  houses  to  which  the  carrying 
and  pushing  of  the  company's  line  might  be  a  matter  of  only 
casual  interest.  If  the  goods  were  called  for,  they  would  be 
supplied;  but  a  consumer's  demand  was  the  only  reason  for 
stocking  and  handling  them  which  these  new  houses  recognized 
as  imperative. 

The  third  transformation  which  had  taken  place  in  the  distribu- 
tion field  was  the  entry  of  the  department  store  and  the  mail  order 
house  into  a  field  which  had  always  been  controlled  exclusively  by 
dominant  specialty  dealers  in  every  town  of  any  size  throughout 
the  country. 

To  arrive  at  these  conclusions  thirty  or  forty  graphic  charts 
were  compiled. 


SALES  AND  ADVERTISING  STATISTICS  21 5 

The  per  capita  consumption  of  the  whole  industry's  products 
was  a  long  and  tedious  job.  In  some  territories  the  books  of  the 
leading  wholesalers  supplied  the  necessary  information,  eked  out 
by  estimates  covering  the  volume  of  those  jobbers  who  were  not  in 
sympathy  with  the  purposes  of  the  inquiry.  In  many  cases  it  was 
necessary  to  draft  local  correspondents,  banks  and  commercial 
agencies  into  the  investigation. 

It  was  not  easy,  from  this  somewhat  formidable  mass  of  matter, 
to  arrive  at  conclusions  which  would  give  a  real  insight  into  con- 
ditions. The  figures  on  which  the  graphic  charts  were  based 
would  have  discouraged  and  possibly  baffled  the  executives, 
whereas  the  graphic  charts  brought  all  the  information  into 
coherent  and  recognizable  relation.  One  by  one  the  conclusions 
projected  themselves  out  of  the  information  gathered  and  satisfied 
even  the  most  skeptical.  Instead  of  guessing  that  the  increasing 
tendency  of  the  population  was  toward  the  city,  and  that  the 
gradual  elimination  of  forests  and  other  uninhabitable  places  was 
one  big  factor  in  reducing  the  consumption  of  the  company's 
goods,  the  graphic  charts  not  only  corroborated  this  theory  com- 
pletely, but  measured  the  exact  extent  of  the  relation  between 
cause  and  effect. 

On  the  main  issues  all  agreed  that  the  evidence  of  the  charts 
was  conclusive.  The  f aUing  off  in  sales  for  the  whole  industry  was 
due  to  the  changed  attitude  of  the  consumer,  coupled  with  the 
general  indifference  of  the  wholesaler  and  the  lack  of  an  incentive 
to  cooperation  on  the  part  of  the  dealer. 

This  conclusion  indicated  as  plainly  as  a  "  graph  "  itself  what 
would  have  to  be  done  to  restore  sales  vigor  and  efficiency.  Con- 
structive educational  work  was  necessary  to  revive  the  interest 
of  the  urban  consumer.  His  changed  situation  had  to  be  taken 
into  consideration  in  framing  the  new  appeal.  New  uses  had  to  be 
discovered  and  pointed  out.  Many  of  the  products  would  need 
adapting  to  this  changed  physical  situation. 

The  consumer's  wants,  desires  and  opportunities  to  use  the 
company's  goods  furnished  the  key  to  the  situation.  The  whole- 
saler's indifference  would  yield  to  the  revival  of  consimaer  demand 
and  the  right  kind  of  selling  effort.    Where  he  failed  to  show  the 


2l6  BUSINESS  STATISTICS 

proper  interest  in  the  new  sales  plans,  the  company  had  a  second 
string  to  its  bow.  It  could  either  transfer  the  account  to 
another  jobber  more  amenable  to  influence  or  deal  with  its 
retailers  direct. 

In  any  event,  the  cooperation  of  the  dealer  was  so  necessary  in 
exploiting  the  product,  in  effective  use  of  local  and  direct  adver- 
tising and  selling  helps  and  in  the  final  man-to-man  trading 
operation  that  the  wholesaler,  as  a  factor  in  sales,  dwindled  in 
importance  as  basic  conditions  in  distribution  became  clearer  and 
better  understood. 

The  advertising  manager,  in  touch  for  the  first  time  with  the 
environment  and  needs  of  consumers,  was  able  to  plan  a  campaign 
which  would  turn  the  attention  of  these  forgetful  buyers  again  to 
the  company's  products.  Knowing  where  the  various  classes 
were  grouped,  he  was  able  to  choose  mediums  and  vary  appeals 
so  that  each  dollar  spent  earned  its  right  proportion  of  inquiries 
and  orders.  His  campaign  directed  at  retail  dealers  had  the  same 
virtue  of  shooting  at  a  mark  made  visible  by  the  light  of  exact 
knowledge. 

The  sales  manager,  in  his  turn,  found  the  board  of  directors  a 
unit  in  backing  up  the  vigorous  program  he  laid  out  for  handling 
the  jobbers  and  coaxing  his  dealers  into  line  with  the  new  pro- 
gram of  cooperation.  Even  on  the  negative  side,  the  investigation 
was  not  without  result.  The  works'  superintendent,  who  had  been 
urging  an  addition  for  two  years,  after  studying  the  "  graphs," 
acquiesced  in  the  board's  decision  that  for  three  years  every 
surplus  dollar  was  worth  double  its  factory  value  if  expended  in 
the  selling  field. 

This  particular  business  has  not  yet  solved  all  of  its  marketing 
problems.  It  has,  however,  made  a  fresh  start  on  a  well-mapped 
road,  with  an  organization  full  of  confidence  in  its  poHcies  and  its 
managers.  It  is  meeting  its  trade  problems  and  tendencies 
inteUigentiy  and  is  gathering  strength  and  experience  in  the 
new  program  and  methods,  while  its  rival  companies,  without 
definite  knowledge  on  which  to  base  their  efforts,  are  piling  blind 
enthusiasm  into  a  widening  breach. 


SALES  AND  ADVERTISING  STATISTICS  21/ 

rv.  Demand  Among  Owners  of  Homes  ^ 

Manufacturers  and  advertisers  who  are  anxious  to  analyze  the 
possible  market  as  definitely  as  may  be  are  likely  to  be  aided 
materially  by  a  line  of  research  which  has  been  undertaken  by  the 
national  Government  and  which  is,  in  great,  measure,  new  to 
Federal  statistics.  This  investigation,  which  is  being  conducted, 
primarily,  by  the  United  States  Census  Bureau,  is  designed  to 
show  what  proportion  of  our  population,  in  town  and  country, 
occupy  their  own  homes,  and  also  what  proportion  of  the  owned 
farms  and  urban  residences  are  free  from  mortgage. 

It  is  probably  well-nigh  superfluous  to  dilate  upon  the  influence 
of  home  ownership  upon  merchandising  conditions,  and  yet  it  is 
suspected  that  there  are  many  distribution  and  sales  interests 
that  have  underestimated  the  weight  of  this  factor  in  consumer 
demand  and  some  that  have  overlooked  it  altogether.  For 
instance,  there  are  some  advertising  and  sales  managers  who, 
while  admitting  the  significance  of  home  ownership  in  the  case  of 
that  large  and  growing  consumer  class  that  buys  on  the  instal- 
ment plan,  have  been  loath  to  concede  that  this  consideration 
enters  in  with  respect  to  ultimate  consumers  who  purchase  for 
cash  through  either  mail-order  or  retail  channels. 

A  more  far-sighted  policy  perhaps  is  that  of  the  advertisers  who 
have  been  impelled  to  study  this  and  all  kindred  subjects  because 
of  a  realization  that  there  is  no  telling  to  what  lengths  the  "  easy- 
payment  "  system  of  selling  will  ultimately  extend.  Originally 
confined,  for  the  most  part,  to  more  or  less  expensive  necessities, 
such  as  sewing  machines,  it  has  rapidly  extended  to  all  manner  of 
luxuries  and,  as  a  straw  that  indicates  the  trend  of  the  wind,  we 
have  the  prediction  from  authoritative  sources  that  a  few  years 
hence  will  see  the  instalment  plan  obtaining  in  the  sale  of  as  large 
a  proportion  of  the  automobiles  marketed  as  it  does  now  in  the 
piano  and  player-piano  line.  And,  just  in  proportion  to  the 
elimination  of  the  jobber  and  the  extension  of  the  scheme  of  sell- 
ing to  the  retailer  direct,  will  all  the  problems  of  instalment-plan 
selling  be  brought  home  to  the  manufacturer. 

1  Printers'  Ink,  October  23,  1913,  pp.  62-68.  Reprinted  by  permission  of 
Printers'  Ink. 


2 1 8  BUSINESS  STATISTICS 

Home  ownership  has,  however,  a  wider  and  more  general  signifi- 
cance than  as  a  test  of  the  financial  responsibility  of  individual 
prospects  for  instalment-plan  selling.  It  would  seem  as  though  a 
study  of  the  statistics  which  will  ultimately  be  available  covering 
the  geographical  distribution  of  homes  owned,  the  proportion  of 
the  properties  free  from  incumbrance,  etc.,  etc.,  could  not  fail  to 
afford  a  worth-while  key  to  market  possibilities.  And  these  self- 
same statistics  will  contain  many  surprises  that  should  have  very 
tangible  value,  especially  for  those  advertisers  whose  policy  it  is 
to  localize  their  campaigns  in  one  way  or  anotner. 

As  has  been  said,  this  line  of  investigation  is,  for  the  most  part, 
an  innovation.  To  be  sure,  some  effort  was  made  in  taking  the 
census  of  1890  to  obtain  data  of  this  kind,  but  the  plan  was 
limited  in  scope.  In  connection,  however,  with  the  recent  census, 
information  on  this  score  was  obtained  in  all  parts  of  the  country 
and  covering  all  classes  of  the  population.  Already  the  Govern- 
ment has  completed  its  investigation  as  to  the  ownership  of 
farms.  And  conditions  on  this  score  in  the  rural  districts  are,  if 
anything,  more  significant  and  more  representative  than  the 
corresponding  status  in  the  cities. 

One  of  the  surprises  above  referred  to  is  found  in  the  lately 
completed  farm  statistics.  We  have  heard  much  in  recent  years 
as  to  the  rapidity  with  which  prosperous  American  farmers  are 
supposed  to  have  been  clearing  off  the  mortgages  on  their  land, 
and  yet  these  new  statistics  show  that  a  larger  proportion  of 
American  farms  are  mortgaged  than  was  the  case  ten  or  twenty 
years  ago.  The  officials  who  have  compiled  these  figures  empha- 
size, however,  that  mortgage  indebtedness  is  not  necessarily  an 
indication  of  lack  of  prosperity.  Although  in  some  cases  mort- 
gages are  placed  on  farms  because  of  poor  crops  or  mismanage- 
ment, such  obligations  more  often  represent  an  unpaid  portion 
of  the  cost  of  the  farm  itself  or  money  expended  for  additional 
land,  for  new  buildings  or  other  improvements  and  for  other 
equipment. 

Following  this  same  line  of  argument  to  the  effect  that  the 
existence  of  a  mortgage,  under  right  conditions,  indicates  an 
ambitious  and  progressive  citizen,  it  might  be  pointed  out  that  in 


SALES  AND  ADVERTISING  STATISTICS  219 

some  respects  the  owner  of  mortgaged  property  constitutes  the 
ideal  prospect  for  the  manufacturers  of  many  lines  of  advertised 
goods.  The  mere  fact  that  such  an  individual  has  a  mortgage  on 
his  farm  or  residence  property  impHes  a  certain  willingness  to 
purchase  on  the  instalment  plan.  He  is  presumably  a  convert  to 
both  the  theory  and  practice  of  instalment  buying,  and  in  order 
that  he  may  be  sold  on  any  proposition,  it  is  only  necessary  to 
convince  him  that  his  comfort,  his  material  prosperity  or  his 
mental  or  physical  welfare  will  be  sufficiently  well  served  to 
justify  incurring  the  responsibilities  involved. 

It  is  a  question,  after  all,  whether  the  man  who,  though  having 
a  dependable  but  modest  income,  is  wedded  to  the  habit  of  pur- 
chasing for  cash  is  not  just  about  the  most  difficult  possible  prop- 
osition for  the  firm  that  is  placing  goods  that  command  prices 
in  three  figures.  That  very  system  or  fear  of  debt  which  impels 
such  a  man  to  always  pay  cash  bespeaks  a  frugality  which  causes 
him  to  hesitate  a  long  time  before  he  will  lay  down  the  sum  (say 
several  hundred  dollars)  necessary  to  purchase  outright  a  pleasure 
vehicle,  a  musical  instrument,  a  reference  library,  art  objects, 
ornamental  furniture  or  any  other  one  of  the  dozens  of  advertised 
products  that  allure  the  average  household.  What  appears  to 
such  a  man  an  almost  reckless  extravagance  when  measured  by 
the  cash  outlay  might  be  regarded  in  an  entirely  different  light 
if  tempered  by  the  monthly-payment  plan.  It  is  possible,  there- 
fore, that  many  interests  in  the  advertising  world  can  derive 
maximum  benefit  by  studying  Uncle  Sam's  new  statistics  not 
merely  to  locate  home  owners,  but  to  determine  where  the  greatest 
percentage  of  home  owners  are  willing  to  place  mortgages  in  order 
to  make  desired  purchases. 

And  in  support  of  the  contention  that  this  is  sound  logic,  it  may 
be  pointed  out  that  the  farm  statistics  just  compiled  show  that 
the  proportion  of  mortgage  indebtedness  is  higher  in  Iowa  and 
Wisconsin  than  in  any  of  the  other  States,  and  yet  these  States 
are  among  the  most  prosperous  in  agriculture.  Or,  again,  take 
the  fact  that  the  most  conspicuous  increase  in  the  proportion  of 
farms  mortgaged  has  been  in  the  southern  part  of  the  country. 
This  increased  activity  in  borrowing  in  Dixie  bespeaks  as  plainly 


220  BUSINESS  STATISTICS 

as  may  be  an  increased  confidence  on  the  part  of  lenders  in  the 
titles  to  land  and  in  the  ability  of  the  farmers  of  the  "  New 
South  "  to  pay  their  debts.  Now,  of  course,  advertisers  have  not 
waited  for  this  intimation  to  prod  them  to  cultivate  the  Southern 
market,  but  it  is  worth  something  as  adding  to  an  accumulating 
weight  of  evidence  to  one  end. 

Taking  into  consideration  the  entire  United  States,  it  is  found 
that  the  proportion  of  mortgaged  farms  in  relation  to  the  whole 
number  of  holdings  increased  from  about  28  per  cent  in  1890  and 
31  per  cent  in  1900  to  more  than  33^^  per  cent  in  1910.  Of  the 
nine  geographical  divisions  in  which  the  country  is  apportioned 
for  statistical  purposes  every  division  showed  an  increase  in  mort- 
gages during  the  first  decade  of  the  century  except  the  Middle 
Atlantic  division,  which  is  made  up  of  the  states  of  New  York, 
New  Jersey  and  Pennsylvania. 

But  there  is  another  side  to  this  story,  and  it  concerns  the 
marked  diminution  during  the  past  twenty  years  in  the  relative 
importance  of  the  mortgage  debt  carried  by  our  farmers.  Thus, 
though  the  proportion  of  farms  mortgaged  has  increased,  the 
latter-day  prosperity  of  our  tillers  of  the  soil  and  the  rapid  increase 
in  the  value  of  farm  land  has  caused  a  sharp  decline  in  the  ratio  of 
debt  to  value,  which  is  given  as  only  27  per  cent  at  the  present 
time,  as  compared  with  more  than  35  per  cent  a  score  of  years  ago. 
But  it  is  no  mystery  that  the  average  farmer's  quickened  buying 
propensities  have  not  by  any  means  kept  pace  with  his  increased 
purchasing  power.  To  facilitate  the  deadly  parallel,  it  is  only 
necessary  to  point  out  that  whereas  mortgage  indebtedness  per 
farm  increased  on  the  average  from  $1,224  i^  1890  to  $1,715  in 
1910,  the  average  owner's  equity  per  farm  mounted  in  the  same 
interval  from  $2,220  to  $4,574.  In  other  words,  it  more  than 
doubled.  The  detailed  figures  show  that  this  increase  in  buying 
power  has  extended  with  a  reasonable  degree  of  uniformity  to 
almost  every  state  in  the  Union. 

While  those  farm  figures  relative  to  indebtedness  and  value, 
which  may  be  translated  as  purchasing  power,  show  so  gratifying 
a  trend,  it  is  also  notable  that  there  is  only  a  slightly  less  satisfac- 
tory state  of  affairs  on  the  basis  proposition  —  namely,  the  farms 


SALES  AND  ADVERTISING  STATISTICS  221 

or  farm  homes  operated  or  occupied  by  owners.  In  the  United 
States  as  a  whole  substantially  five-eighths  of  the  farms  are 
operated  by  owners,  and  the  remaining  three-eighths  are  in  the 
hands  of  tenants.  It  is  worthy  of  note,  however,  as  indicative  of 
a  marked  tendency,  that  during  the  past  ten  years  the  farms 
operated  by  tenants  increased  much  more  rapidly  —  twice  as 
rapidly,  in  fact  —  than  those  operated  by  owners.  The  per- 
centage of  increase  in  the  case  of  the  former  was  i6  per  cent,  as 
compared  with  8  per  cent  in  the  case  of  the  latter.  This  is  no  new 
manifestation,  however.  Ever  since  1880,  and  probably  from  an 
even  earlier  date,  the  farms  operated  by  tenants  have,  in  each 
decade,  increased  faster  than  those  operated  by  owners.  Just 
what  bearing  the  current  "  back-to-the-land  "  movement  will 
have  on  this  tendency  is  bound  to  be  watched  with  interest  by 
many  advertisers. 

There  are  in  some  sections  of  the  country  proportionately  more 
farms  operated  or  occupied  by  owners  than  is  the  case  in  other 
districts  —  this  being  a  point  not  to  be  overlooked  by  those  selling 
to  rural  consumers.  Throughout  the  South,  for  instance,  there  is 
a  high  proportion  of  tenant  farmers,  the  proportion  of  tenant 
farms  exceeding  50  per  cent  of  the  total  in  the  greater  part  of 
Dixie.  There  is  also  a  comparatively  large  proportion  of  tenant 
farms  in  such  states  as  the  Dakotas,  Missouri,  Minnesota,  Iowa, 
Kansas  and  Nebraska.  On  the  other  hand,  there  is  a  minimum 
of  tenant  farmers  in  New  England,  and  there  is  a  small  percentage 
of  such  farmers  on  the  Pacific  Coast  and  in  the  Rocky  Mountain 
states.  It  is  interesting  to  note  that  throughout  what  is  com- 
monly known  as  the  Middle  West,  perhaps  the  most  important 
farming  section  of  the  country,  and  in  all  parts  of  the  South,  the 
tenant  farms  formed  a  larger  proportion  and  the  farms  operated 
by  owners  a  smaller  proportion  of  the  total  number  of  farms  in 
1910  than  in  1900,  but  the  opposite  is  true  in  New  England,  on 
the  Pacific  Coast,  in  the  Rocky  Mountain  country  and  in  the 
states  of  New  York,  New  Jersey  and  Pennsylvania.  Shall  we 
construe  it  that  these  districts  are  the  chief  objectives  of  the 
"  back-to-the-land  "  crusaders  ? 

The  proportion  of  home  owners  among  the  farm  population  will 
doubtless  be  closely  compared  with  the  percentage  of  home  owners 


222  BUSINESS  STATISTICS 

among  urban  residents  when  figures  are  obtainable  indicative  of 
the  latter.  On  the  face  of  it  the  comparison  will  presumably  be 
very  favorable  to  the  rural  market  and  will  doubtless  be  made  the 
basis  for  many  arguments  on  the  part  of  those  who  contend  that  a 
home  owner  is  the  best  prospect  for  many  classes  of  advertised 
articles.  As  a  matter  of  fact,  there  are  two  sides  to  the  question, 
and  the  varied  and  insistent  advertising  appeal  and  superior 
merchandising  conditions  of  the  city  must  be  taken  into  account; 
but,  nevertheless,  it  is  a  dominant  fact  that  the  average  individual 
will  take  more  interest  in  furnishing  and  ornamenting  a  home 
which  he  owns  than  one  which  he  rents,  and  there  are  many  per- 
sons who  hesitate  to  acquire  any  more  bulky  possessions  than  are 
absolutely  necessary  so  long  as  they  occupy  rented  quarters  with 
the  prospect  of  a  removal  once  a  year  or  of tener. 

It  is  certain,  too,  that  the  proportion  of  home  owners  will  be 
shown  to  vary  tremendously  in  different  cities.  Communities 
made  up  of  detached  houses,  such  as  are  found  to  so  large  an 
extent  in  Detroit,  Cleveland,  Indianapolis,  Buffalo  and  other 
cities  of  like  character,  will  show  a  much  greater  ratio  of  dwellings 
occupied  by  owners  than  will  those  Eastern  cities  where  the  vast 
majority  of  the  population  reside  in  hotels,  flats  and  apartments. 
In  the  case  of  the  latter  communities  —  and  even  with  respect  to 
cities  such  as  Pittsburgh  and  Los  Angeles  —  full  justice  could  be 
done  in  the  matter  of  home  ownership  only  in  the  event  that  it 
were  possible  to  embody  with  the  statistics  of  the  city  proper  the 
figures  for  surrounding  suburbs. 

Even  if  it  be  open  to  argument  whether  it  is  easier  to  sell  to  a 
home  owner  than  a  renter  or  whether  the  one  is  a  prospect  more 
worthy  of  cultivation  than  the  other,  it  must  be  conceded  that  the 
home  owners  are  the  more  readily  reached  with  certain  forms  of 
advertising  appeal  —  notably  the  booklets,  circulars,  catalogues, 
etc.,  that  are  distributed  by  mail.  Home  owners  move  much  less 
frequently  than  renters,  and  consequently  a  mailing  list  gains  in 
permanency  and  dependability  just  in  proportion  to  the  number 
of  names  of  home  owners  it  contains.  Similarly,  the  tastes  of  the 
home  owner  are  likely  to  be  better  known  by  the  neighborhood 
tradesmen,  and  this  is  sometimes  a  factor  in  demonstration  work 


SALES  AND  ADVERTISING  STATISTICS  223 

at  retail  stores  and  in  securing  an  introduction  for  new  products. 
Finally,  the  home  owner  is  personally  in  the  market  for  many 
articles,  such  as  screens,  paint,  seed,  stoves,  window  shades,  etc., 
to  which  the  renter  pays  little  direct  attention. 

V.  Planning  Next  Year's  Business  ^ 

By  Melville  W.  Mix 

We  all  know  that  at  the  end  of  next  year  we  can  look  back,  figure 
up  the  total  business  we  have  done  this  year,  the  profit  we  have 
made.  But  we  don't  realize  that  the  volume  of  next  year's  busi- 
ness and  especially  the  amount  of  next  year's  profits  depend  on 
how  accurately  we  are  able  to  prejudge  the  coming  year's  busi- 
ness, plan  it  and  prepare  for  it.  For  years  I  have  made  it  part  of 
my  organization  work  to  plan  next  year's  business.  Organization 
work,  I  say  —  for  to  lay  out  accurately  and  effectively  the  coming 
season's  business  requires  that  the  organization  and  systems  of 
the  concern  be  such  that  they  will  adapt  themselves  to  this  pur- 
pose. Sales  and  factory  organization,  sales  records  and  reports, 
cost  systems  and  stock  systems,  selling  methods  and  shop  practice 
—  must  all  do  their  share  in  making  the  look-ahead  possible. 

That  an  accurate  look-ahead  is  possible  —  that  next  year's 
sales  can  be  determined  in  detail  and  prepared  for,  that  the  fac- 
tory's work  can  be  laid  out  and  scheduled  —  I  have  proved  to 
myself  time  and  again.  It  was  this  system  that  enabled  us  to  see 
the  stringency  of  two  years  ago  twelve  months  ahead,  and  con- 
sequently to  adjust  our  business  accordingly.  It  was  this  system 
that  told  us  just  the  appropriate  time  to  launch  our  general 
advertising  campaign,  and  so  increase  our  sales  thirty-eight 
per  cent. 

Planning  ahead  for  the  coming  year  cannot  start  the  last  month 
of  this  year.  It  must  be  begun  years  before  —  a  quarter  of  a  cen- 
tury in  our  case.  For  a  planning-for-next-year  system  must  have 
the  most  accurate  basis:  figures  —  cold,  hard,  mathematical 
figures;  and  facts  —  proved,  recorded  facts. 

^  System,  September,  1909,  pp.  253-259.  Reprinted  by  permission  of  System. 
Illustrations  of  forms  are  omitted. 


224  BUSINESS  STATISTICS 

Our  records  of  business  run  back  for  twenty-seven  years; 
definitely  tabulated  as  to  sales  by  territories  and  lines  of  goods; 
as  to  production  by  costs  and  stocks  on  hand. 

That  is  the  basis  of  our  prophetic  powers.  Like  the  source  of 
most  things  that  look  like  genius,  it  is  just  —  knowledge. 

Our  fiscal  year  ends  December  31;  the  stockholders'  meeting 
comes  in  February.  During  the  intervening  month  we  put  into 
definite  shape  our  plans  for  next  year.  These  plans  fork  in  three 
directions:  we  determine  next  year's  sales  and  lay  out  the  selling 
campaign;  we  study  our  manufacturing  facilities  and  see  that 
the  factory  has  capacity  to  turn  out  the  sales  quota;  we  plan  for 
expansion  —  new  lines  of  manufacture,  new  facilities  for  increased 
output. 

Planning  ahead  means  first  determining  probable  sales.  For 
seUing  the  goods  is  the  last  step  in  the  process  of  manufacture,  but 
the  first  is  determining  the  amount  to  manufacture.  No  wisdom 
lies  in  preparing  to  make  what  can't  be  profitably  sold. 

The  figures  of  last  year's  sales  are  the  basis  for  judgment  of 
next  season's  business.  These  figures  are  so  tabulated  that  I  know 
the  exact  sales  made  in  each  territory  and  through  each  agency, 
by  lines  of  goods  and  by  periods.  Our  goods  are  sold  through  two 
hundred  and  forty  agents  covering  the  whole  country,  through 
salesmen  in  our  branch  houses  in  the  large  industrial  centers,  and 
through  salesmen  working  direct  from  the  home  office.  Our  sales 
are  classified  into  thirty-eight  different  lines  and  are  recorded 
under  thirty-eight  corresponding  sales  accounts. 

A  record  of  our  sales  is  kept  for  each  one  of  these  various  sales 
units  classified  according  to  these  thirty-eight  accounts.  The 
first  source  of  our  records  is  the  orders  as  they  come  in  from  the 
various  agents  and  salesmen.  These  orders  are  classified  and 
tabulated  until  they  finally  reach  me  in  a  concentrated  form. 
One  sheet  is  given  to  the  record  of  each  sales  unit  for  one  month, 
classified  according  to  the  thirty-eight  sales  accounts  and  tabu- 
lated so  as  to  show  comparisons  with  the  previous  month,  with 
the  same  month  the  previous  year,  and  with  the  total  of  the 
current  and  the  previous  year.  The  sheets  for  each  sales  unit 
are  bound  together  in  a  pamphlet  so  as  to  bring  together  a 
complete  record  for  a  year. 


SALES  AND  ADVERTISING  STATISTICS  225 

The  sheets  keep  me  informed  of  the  exact  conditions  in  every 
agency  and  in  every  territory  and  of  every  line  of  goods.  I  keep 
track  of  increases  and  decreases  in  the  sales  of  agents  and  of  the 
sales  of  different  lines.  I  can  follow  exactly  the  tendencies  in  the 
different  territories  and  in  the  different  lines. 

But  the  figures  alone  do  not  tell  the  "  why  ";  they  show  what 
is  going  on  but  they  do  not  show  the  reasons.  So  another  source 
of  information  is  necessary  —  information  concerning  business 
conditions,  concerning  developments  in  our  trade  and  among  our 
customers,  concerning  the  circumstances  and  methods  of  our 
selling  agents,  concerning  the  circumstances  that  surround  each 
transaction  and  each  development  in  our  business. 

This  nebula  of  facts  and  of  human  interest  which  envelops  the 
selling  end  must  be  taken  into  consideration  in  judging  the  possi- 
bilities of  business  for  next  year.  This  information  I  glean  from 
sales  reports  which  come  in  every  day  from  our  salesmen  and  less 
frequently  from  our  agents,  from  various  mediums  of  trade  news, 
from  personal  observation  and  letters  and  from  special  reports. 

Especially  do  I  watch  the  causes  that  lead  to  an  increase  in  the 
sales  of  any  line  of  goods  in  any  territory,  for  in  planning  next 
year's  work  I  must  know  whether  these  conditions  are  going  to 
continue  and  whether  the  conditions  and  methods  that  have 
brought  about  the  increase  cannot  be  duplicated  in  other  terri- 
tories and  in  other  agencies.  For  it  is  not  enough  for  an  executive 
head  to  arbitrarily  lay  down  the  volume  of  business  for  the  coming 
year;  he  must  mark  out  the  lines  and  plan  the  methods  that  will 
bring  this  amount  of  business. 

With  these  sources  of  information  then  —  the  figures  of  pre- 
vious years'  sales  and  the  knowledge  of  trade  conditions  —  the 
'  next  year's  sales  quota  is  determined.  Each  unit  of  the  organiza- 
tion is  taken  up  in  turn.  With  the  comparative  figures  of  previous 
years'  sales  before  me,  I  call  to  mind  the  conditions  in  this  terri- 
tory and  in  this  sales  unit,  determine  what  pressure  for  additional 
sales  can  be  brought  to  bear,  estimate  what  the  conditions  the 
coming  year  will  probably  be ;  then  I  determine  what  increase 
all  these  factors  are  likely  to  bring  and  set  a  sales  quota  for 
this  unit. 


226  BUSINESS  STATISTICS 

After  all,  I  regard  the  most  important  point  in  planning  next 
year's  work  to  be  not  the  determination  of  the  sale's  quota,  but  the 
laying  out  of  the  actual  methods  we  will  pursue  to  help  the  agent 
sell  his  quota.  Because  much  of  our  business  is  handled  through 
agents,  the  agency  is  the  first  source  of  next  year's  business  to 
be  studied. 

One  of  our  special  sources  of  information  on  the  agent  is  an 
agency  record,  kept  apart  from  the  general  sales  records,  where 
the  facts  regarding  each  agent  are  recorded.  This  card  indicates 
at  a  glance  what  the  agent's  quota  of  sales  has  been  for  several 
years,  how  close  he  came  to  selling  this  amount,  what  the  condi- 
tions in  his  territory  have  been  and  any  further  general  facts 
regarding  him.  The  record  also  shows  the  definite  aid  in  selling 
given  him  by  the  house  —  such  as  local  advertising,  circular 
letters,  advertising  hterature  —  and  what  the  cost  of  this  adver- 
tising amounted  to. 

Now  suppose  we  find  from  our  records  that  we  have  sold  a 
particularly  large  amount  of  some  Hne  in  a  territory.  We  find  out 
the  reasons,  the  methods  by  which  these  sales  were  made;  if  these 
can  be  duplicated  we  tell  our  other  agents  about  them  and  we 
estimate  how  big  an  increase  in  their  sales  they  should  bring.  If 
a  certain  line  of  local  advertising  or  circular  letter  work  that  we 
have  done  for  one  agent  has  proved  successful,  we  duplicate  it 
among  other  agents.  If  certain  goods  have  proved  particularly 
profitable  we  give  agents  special  methods  for  pushing  them.  And 
all  these  cases  affect  the  quota  finally  determined. 

Local  conditions,  of  course,  often  govern  big  sales;  they  must 
be  considered  in  the  agent's  quota.  Certain  local  changes  during 
the  past  year  may  have  raised  sales  to  a  point  which  cannot  be 
maintained;  new  conditions  about  to  materialize  may  greatly 
increase  the  possibilities  of  sales. 

Enthusiasm  and  prestige  I  consider  definite  bases  for  increases 
in  the  sales  —  provided  that  enthusiasm  is  instilled  into  agents 
and  our  prestige  is  brought  to  their  realization.  We  strive  to 
awaken  in  the  agent  himself  the  desire  and  the  initiative  to  in- 
crease his  sales.  This  is  one  of  the  functions  of  our  publicity 
advertising,  of  our  house  organ,  and  of  our  agents'  conventions. 


SALES  AND  ADVERTISING  STATISTICS  22/ 

And  particularly  we  are  always  pointing  out  to  every  agent 
that  the  very  fact  of  his  being  our  agent  is  an  asset  to  him;  and 
that  this  asset  appreciates  in  value  as  his  sales  increase.  Many  a 
time  have  I  told  the  story  of  the  specialty  agent  in  New  Orleans 
who,  when  he  sold  out  his  business  and  inventoried  his  stocks, 
fixtures  and  so  on,  added  an  item  for  prestige,  $50,000  —  and  got 
it.  And  the  good-will  of  an  agency  is  nothing  more  than  the  com- 
bination of  his  own  prestige  and  the  prestige  of  the  manufacturers 
whose  goods  he  handles. 

With  the  sales  quota  determined  in  detail,  the  manufacturing 
quota  for  the  year  is  easily  fixed:  it  is  simply  the  sum  of  the 
thirty-eight  lines  of  stock,  totaled  from  the  sales-unit  sheets. 
Manufactured  stocks  are  carried  in  the  records  of  the  manager 
of  manufacture  under  the  same  general  groupings  as  in  the  sales 
accounts.  Subtracting  stock  on  hand  from  the  sales  quota  of 
each  line,  therefore,  tells  the  quantity  of  each  product  to  be 
manufactured  during  the  coming  year. 

This  quota  is,  of  course,  not  followed  blindly  by  the  factory; 
it  serves  rather  to  point  the  direction  that  next  year's  production 
will  take.  Its  greater  value  lies  in  the  basis  it  affords  the  man- 
ager of  manufacture  for  systematizing  his  factory  practice  and 
reducing  his  costs. 

So  far  as  actual  manufacturing  is  concerned,  the  schedule  is 
handled  flexibly.  The  manager  of  manufacture  does  start  his 
production  on  the  basis  of  the  quota  which  the  sales  department 
has  planned  for.  But  he  does  not  work  far  enough  ahead  to  be 
caught  unawares  by  any  variation  in  actual  sales  from  quota.  He 
accomplishes  this  by  means  of  an  inventory  and  stock  order  sys- 
tem, which  gives  him  a  firm  grasp  on  production.  He  really 
schedules  his  work  on  the  basis  of  three  facts:  last  year's  orders 
for  the  same  period,  the  total  of  orders  as  they  are  coming  in  from 
day  to  day,  the  expectation  of  sales  as  they  are  shown  by  the 
quota. 

His  sole  object  is  to  manufacture  enough  stock  to  keep  suffi- 
ciently ahead  of  the  sales  demand  that  he  will  not  be  caught 
under-stocked,  and  yet  not  build  on  estimates  so  far  ahead  that 
there  is  liability  of  over-stocking. 


228  BUSINESS  STATISTICS 

The  summary  cards  for  stock  orders  are  like  those  for  sales. 
These  summary  cards  are  filled  out  every  two  weeks,  so  that 
instead  of  plamiing  his  work  for  six  months  or  a  year  ahead  in 
the  way  that  the  sales  department  must  plan,  the  shop  superin- 
tendent in  working  out  in  detail  the  plans  of  the  sales  department 
makes  new  plans  practically  every  two  weeks.  Consequently,  if 
some  lines  of  goods  in  which  a  big  sale  is  anticipated  fail  to  meet 
expectations,  no  huge  stock  of  that  particular  line  of  goods  is  on 
hand  to  be  carried  over  into  next  year. 

No  maximum  and  minimum  stock  is  fixed.  The  sales  on  a 
particular  item  for  the  year  before  are  scheduled  on  a  finished 
stock  card  and  the  orders  for  stock  are  made  out  in  the  super- 
intendent's office  on  the  basis  of  the  relation  between  the  per- 
petual inventory  kept  there  on  the  stock  card  as  it  varies  from 
month  to  month  in  its  relation  to  the  sales  quantity  of  the 
previous  year. 

The  manager  of  manufacture  watches  the  stock  accumulation 
at  two  points  —  after  it  leaves  the  foundry  and  is  stored  as 
"  rough  stock  "  and  after  it  is  machined  and  held  as  "  finished 
stock."  Two  sets  of  stock  inventory  cards  corresponding  to  each 
item  in  stock  are  kept  by  four  clerks  in  the  superintendent's 
office. 

In  handling  rough  stock  and  finished  stock  a  definite  relation 
is  maintained  between  the  total  quantities  of  each  pattern  on 
hand.  One  of  the  methods  adopted  to  hold  this  stock  to  the 
minimum  and  yet  be  able  to  meet  sudden  demands  for  goods  is 
to  standardize  parts  as  completely  as  possible. 

But  the  real  planning  ahead  that  the  manager  of  manufacture 
does,  in  which  and  for  which  the  sales  quota  affords  him  the  basis, 
is  in  determining  what  the  general  line  of  his  manufacturing  for 
the  coming  year  is  to  be,  what  capacity  he  must  provide  for,  what 
equipment  he  must  have,  how  he  can  standardize  stock  and 
operations,  and  where,  taking  all  these,  elements  into  considera- 
tion, he  can  cut  costs. 

If  he  knows  that  he  will  have,  say,  ten  thousand  of  a  certain 
part  to  make  next  year  where  he  had  one  thousand  last,  he  has  an 
entirely  different  problem  of  department  arrangement,  machine 


SALES  AND  ADVERTISING  STATISTICS  229 

equipment  and  organization;  and  there  are  opened  up  to  him 
possibilities  for  cost  reduction  that  the  previous  smaller  volume 
has  not  allowed. 

As  far  as  possible  the  product  is  standardized,  not  only  to 
cheapen  the  cost  of  manufacture  but  to  give  better  service  to 
customers. 

Detailed  improvements  in  machinery  cannot  be  minutely 
planned.  General  consideration  of  reducing  the  cost  of  certain 
lines  can  be  made,  however,  and  then  worked  out  in  detail  under 
circumstances  as  in  this  case.  This  constant  study  to  reduce  the 
cost  of  manufacture  is  based,  like  our  plans  for  next  year's  sales, 
on  past  records. 

Besides  laying  out  a  definite  sales  and  manufacturing  cam- 
paign, the  question  of  expansion  always  has  to  be  considered 
when  next  year's  work  is  planned.  Expansion  follows  lines  of 
least  resistance.  Sometimes  service  to  a  customer  suggests  a  line 
of  equipment  which  might  profitably  be  fitted  into  the  sales  and 
manufacturing  campaign.  General  tendencies  in  business  often 
open  up  new  possibilities.  A  class  of  manufacturing  may  have 
been  at  a  standstill  for  a  decade.  Then  some  big,  new  develop- 
ment will  come  which  will  make  a  market  for  a  new  specialized 
equipment.  For  several  years  there  have  been  few  if  any  new 
flour  mills.  There  is  only  enough  new  material  to  supply  a  maxi- 
mum number  of  factories,  and  this  number  has  practically  been 
reached.  And  as  our  product  deteriorates  little  in  use,  there  is 
no  big  demand  for  new  equipment  to  replace  old;  so  when  no  new 
factories  are  going  up  the  demand  for  our  product  falls  off.  But 
electrical  development  has  taken  place.  Hydro-electric  instead  of 
steam  power  has  made  possible  a  lower  cost  of  manufacturing 
and,  consequently,  mills  are  being  overhauled  and  re-equipped. 
Here  is  a  condition  which  must  be  watched  for,  a  tendency  in 
manufacture  which  means  more  business  in  the  future.  It  is 
dangerous  to  determine  on  a  marked  increase  in  the  sales  quota 
without  providing  a  corresponding  increase  in  production 
facilities. 

Expansion,  then,  cannot  be  made  the  moment  the  increased 
quota  is  determined,  but  the  plans  should  be  laid  and  the  way 


230  BUSINESS  STATISTICS 

smoothed  so  that  when  the  increase  does  come  facilities  can  be 
expanded  rapidly.  For  additional  orders  are  turned  into  a  loss 
rather  than  a  profit  when  production  in  the  plant  must  be 
overstrained  to  handle  them. 

VI.  Sales  Development  ^ 

In  some  organizations  it  takes  a  long  time  to  discover  the  little 
deserts  on  the  territorial  map  of  sales,  and,  when  found,  ordinary 
methods  of  irrigation  often  fail  to  make  them  productive. 

Some  concerns  accept  a  known  selling  weal^^ness  in  certain  sec- 
tions as  one  of  the  inevitable  results  of  competition.  Others  are 
not  so  easily  pacified.  They  want  to  know  why,  specifically.  If 
the  desire  for  knowledge  is  strong  and  persistent  the  answer  is 
usually  found,  and  with  it  the  remedy. 

Several  years  ago  a  representative  New  England  shoe  house 
installed  a  new  sales  manager.  His  predecessor  in  that  capacity 
was  a  member  of  the  firm  who  found  it  necessary  to  unload  some 
of  his  growing  executive  burdens. 

The  business  had  grown  steadily  and  no  special  need  of  greater 
seUing  efficiency  was  apparent  at  that  time.  The  firm  employed 
about  fifty  salesmen  —  a  force  that  supposedly  was  covering  the 
whole  country.  It  was  expected  that  the  volume  of  sales  would 
continue  to  grow  through  a  natural  individual  development 
among  the  salesmen. 

But  the  new  sales  manager  brought  with  him  a  fresh  viewpoint 
that  was  not  molded  and  hedged  in  by  the  precedents  and  estab- 
lished methods  of  the  firm.  He  also  possessed  an  inquiring  mind, 
so  he  began  to  analyze  the  sales  policy  and  check  up  results  in  a 
definite  way. 

While  his  use  of  maps  and  tacks  in  spotting  sales  will  not  be 
news  to  most  sales  managers,  the  manner  in  which  he  employed 
these  devices  to  pry  salesmen  away  from  jealously  guarded  terri- 
tory without  hurting  their  feelings  overmuch  is  likely  to  prove 
suggestive. 

One  of  the  first  things  that  the  new  man  did  was  to  study  the 

individual  territory  of  each  salesman  —  estimate  what  it  should 

^  Printers'  Ink,  April  i,  1915,  pp.  3-8.  Reprinted  by  permission  oi  Printers' Ink. 


SALES  AND  ADVERTISING  STATISTICS  23  I 

produce  in  sales  for  his  house,  and  compare  this  result  with  what 
was  being  produced. 

In  order  to  do  this  intelligently  he  procured  a  map  cabinet  and 
a  set  of  state  maps.  Now  most  concerns  whose  policy  it  is  to 
designate  a  route  for  their  salesmen  use  a  map  system  for  that 
purpose,  but  many  concerns  depend  largely  on  the  initiative  of 
their  salesmen  in  this  and  many  other  respects,  and  judge  their 
efficiency  on  aggregate  results.  The  firm  in  question  had  fol- 
lowed the  latter  method,  and  territory  had  been  allotted  largely 
by  states,  so  a  map  system  had  not  been  considered  necessary. 

But  this  sales  manager  found  other  uses  for  a  map  record  — 
first  he  carefully  drew  the  boundary  lines  of  each  salesman's 
territory  on  the  maps  wherever  more  than  one  salesman  worked  in 
the  same  state.  Then  he  prepared  a  list  of  every  town  of  five 
hundred  population  and  over  in  each  territory.  That  was  the 
range  of  towns  in  which  the  goods  could  be  sold  profitably. 

These  lists  were  then  compared  with  the  sales  records,  and  each 
town  checked  to  indicate  whether  the  house  sold  any  goods  there. 

When  the  lists  were  completed  they  told  an  amazing  and  very 
interesting  story.  The  average  salesman  was  selling  goods  in  only 
about  half  the  towns  in  his  territory. 

At  one  stroke  the  new  sales  manager  had  uncovered  a  vast  field 
for  sales  development. 

He  analyzed  it  more  closely.  First  he  transferred  the  informa- 
tion given  in  the  lists  to  the  territorial  maps  by  using  a  green- 
headed  tack  to  designate  every  town  where  the  company  sold 
goods.  Red-headed  tacks  were  used  to  indicate  the  no-sale  or 
opportunity  towns.  The  maps  then  presented  a  comprehensive 
picture  of  each  salesman's  territory.  The  weak  spots  stood  out  in 
the  hmelight  —  a  surprising  number  of  them. 

Why  ?  How  can  they  be  eliminated  ?  These  were  the  next 
questions. 

The  Hsts  were  revised  to  show  a  more  complete  story,  which* 
included  the  population  of  each  town,  the  names  of  all  well- 
rated  dealers  in  each  town,  and  the  exact  amount  of  sales  to  each 
customer  during  the  preceding  year.  These  facts,  when  assembled, 
disclosed  other  valuable  information.     They  brought  to  light 


232  BUSINESS  STATISTICS 

special  weaknesses  of  various  kinds  in  individual  salesmen.  One 
salesman's  record,  for  example,  showed  no  sales  whatever  in 
towns  of  less  than  5,000  population.  Evidently  he  passed  up 
smaller  towns  entirely.  Another  salesman  seemed  to  take  the 
opposite  course.  His  small  towns  were  nearly  all  well  developed, 
but  he  secured  very  little  business  in  the  large  cities.  It  was 
noticeable  that  some  men  almost  invariably  secured  their  orders 
from  concerns  whose  commercial  ratings  indicated  them  to  be  the 
smaller  stores  in  a  town.  In  fact  the  lists  and  the  maps  together 
provided  an  excellent  bird's-eye  of  what  each  salesman  was  doing 
in  his  territory. 

Of  course  it  was  not  safe  to  rely  altogether  on  this  information, 
because  there  are  influences  and  local  conditions  which  cannot  be 
visualized  accurately  from  a  private  office.  However,  here  was  a 
basis  for  constructive  sales  development  —  and  more  intelligent 
supervision  of  the  salesmen. 

A  copy  of  the  list  pertaining  to  his  territory  was  sent  to  each 
salesman,  together  with  a  letter  directing  his  attention  to  obvious 
conclusions. 

The  letter  was  not  in  the  form  of  a  reprimand,  nor  did  it  con- 
tain any  definite  instructions  that  would  be  construed  as  a  posi- 
tive order.  It  pointed  out  the  opportunities  of  the  salesman  to 
increase  his  sales  by  more  thorough  application  along  certain 
definite  lines.  Furthermore,  each  salesman  was  told  that  the 
house  was  going  to  conduct  a  special  direct  mail  campaign  to 
interest  every  well- rated  dealer  in  every  town  where  he  was  not 
selling  goods. 

The  inference  of  course  was  that  he  was  expected  to  call  on 
those  dealers. 

This  had  a  distinct  moral  effect  on  most  of  the  men,  as  they 
realized  for  the  first  time  that  their  work  was  being  closely 
watched  in  the  house. 

Many  of  them  took  the  cue  and  succeeded  in  opening  some  nice 
new  accounts. 

Also,  the  mail  campaign  stimulated  a  good  many  inquiries 
which  forced  them  to  call  on  dealers  they  had  never  solicited 
before. 


SALES  AND  ADVERTISING  STATISTICS  233 

As  a  matter  of  fact,  however,  it  developed  that  most  of  the 
salesmen  had  too  much  territory  —  more  than  they  could  work 
thoroughly.  Naturally  they  had  hit  only  the  high  spots  at  first, 
and  gradually  settled  down  to  devoting  most  of  their  time  to 
regular  customers.  The  sales  manager  arrived  at  this  conclusion 
as  the  first  season  drew  to  an  end,  because  the  red-headed  tacks 
were  still  very  much  in  evidence  on  the  maps. 

Here  was  a  problem  that  required  some  thought.  It  meant 
putting  on  more  men.  The  only  way  to  make  room  for  new  men 
was  to  take  territory  from  old  ones  —  and  the  average  salesman 
is  jealous.  A  closer  study  of  the  maps  and  the  red  tacks  helped 
to  solve  this  problem. 

One  example  will  illustrate  what  was  discovered  and  what 
occurred  in  most  cases:  The  territory  of  one  salesman  consisted 
of  the  whole  state  of  Georgia.  He  lived  in  Atlanta  and  made  that 
city  his  headquarters.  If  you  should  draw  a  horizontal  line 
through  the  center  of  the  state  you  would  find  that  Atlanta  is 
located  nearly  in  the  center  of  the  upper  half.  The  tacks  on  the 
map  of  Georgia  showed  that  this  salesman  got  most  of  his  busi- 
ness in  the  upper  half  of  the  state.  In  other  words,  he  spent  most 
of  his  time  near  home,  and  even  in  that  section  there  were  more 
red  tacks  than  there  were  green  ones  in  the  lower  part  of  the 
state. 

It  so  happened  in  this  case  that  another  salesman,  who  was  a 
prodigious  worker,  had  found  the  state  of  Florida  too  small  to 
occupy  all  of  his  time.  Consequently  a  slice  of  southern  Georgia 
was  taken  from  the  Georgia  man  and  given  to  the  Florida  man. 
The  Georgia  man  kicked  like  a  steer,  at  first,  but  gave  up  when  he 
was  shown  that  the  business  he  really  lost  by  the  transaction  was 
hardly  enough  to  justify  the  time  and  expense  of  getting  it.  He 
was  also  shown  a  lot  of  red-headed  tacks  in  the  remaining  part  of 
his  territory. 

During  the  next  season  both  men  increased  their  sales  —  the 
original  Georgia  man  about  $10,000  with  less  territory,  and  the 
Florida  man  got  about  $20,000  out  of  his  new  Georgia  territory. 

But,  when  the  sales  manager  checked  up  those  tacks  on  the 
map  again  he  found  almost  as  many  red  ones  in  the  original 


234  BUSINESS  STATISTICS 

Georgia  man^s  territory  as  there  had  been  at  the  beginning  of  the 
season.  He  also  observed  that  most  of  them  were  grouped  in  one 
section.  He  ruled  off  that  section,  and  then  figured  the  amount 
of  business  the  salesman  would  lose  if  he  took  it  away  from  him. 
It  amounted  to  about  $5,000.  Then  he  figured  the  possibilities 
of  the  entire  section  and  found  it  sufficient  to  support  a  salesman 
of  average  abihty.  He  submitted  it  to  a  promising  apphcant  who 
lived  in  the  section,  and  it  was  accepted. 

The  original  Georgia  man  was  displeased  again,  but  he  didn't 
show  much  fight.  The  red  tacks  and  the  figures  didn't  leave 
much  ground  for  him  to  stand  on.  He  said  the  new  man  would 
starve  to  death  and  the  territory  would  come  back  to  him  in  six 
months. 

But  it  didn't.  The  new  man  sold  almost  as  many  goods  as  the 
old  one  did,  and  the  latter  registered  another  small  increase  in 
sales  the  following  season. 

Moreover  both  men  have  continued  to  increase  their  business, 
and  today  Georgia  yields  to  that  firm  over  three  times  the  business 
it  did  before  the  red  tacks  were  put  on  the  job. 

The  Georgia  experience  was  repeated  with  slight  variations  in  a 
good  many  other  states.  In  some  cases  the  new  men  developed 
into  better  salesmen  than  the  old  ones.  The  original  force  of  fifty 
men  has  been  increased  to  eighty-five,  and  there  was  only  one  of 
the  old  men  who  decided  to  quit  rather  than  give  up  any  of  his 
territory.  He  was  allowed  to  take  his  choice  and  he  has  wanted 
to  get  back  ever  since. 

In  working  out  this  plan,  great  care  was  taken  to  be  fair  and 
just  to  the  old  men.  No  territory  was  taken  from  any  man  who 
could  and  would  work  it  satisfactorily.  In  some  cases  they  were 
given  an  opportunity  tp  demonstrate  better  results. 

Some  of  them  would  plead  only  for  the  privilege  of  retaining 
certain  towns  where  they  had  estabHshed  customers.  This 
request  was  granted  in  a  few  instances,  but  the  idea  did  not  work 
out  well.  Such  towns  were  usually  the  best  ones  in  the  territory 
and  it  discouraged  the  new  man  if  they  were  excepted  from  his 
territory. 

This  firm  still  has  use  for  a  few  red  tacks,  but  they  are  pretty 
well  scattered  over  the  maps  and  usually  denote  a  small  town 


SALES  AND  ADVERTISING  STATISTICS  235 

where  few  dealers  and  strong  competition  make  it  hard  to  get  a 
foothold. 

The  experience  of  this  concern  proved  that  the  weak  spots  in 
its  distribution  were  due  largely  to  lack  of  proper  cultivation. 
Moreover,  a  rather  loose  sales  policy  had  made  it  possible  for  such 
a  condition  to  exist  for  some  time  before  it  became  known.  The 
result  was  not  only  a  loss  of  business  that  could  never  be  replaced, 
but  was  also  a  partial  waste  of  money  that  had  been  spent  for 
both  trade  and  consumer  advertising. 

VII.  Need  of  a  Federa^l  Trade  Census  ^ 

By  Melvtn  T.  Copeland 

The  study  of  domestic  trade  in  the  United  States  is  seriously 
hindered  by  the  dearth  of  readily  accessible  information.  To 
facilitate  researches  in  this  field  there  is  a  need  of  a  federal  census 
of  market  distributors  —  dealers  in  raw  materials,  commission 
merchants,  wholesalers,  and  retailers.  These  merchants  make  up 
a  numerous  and,  in  general,  a  necessary  class  in  our  population. 
Their  activities  affect  every  inhabitant  of  the  country.  There 
would  be  a  widespread  and  vital  interest,  therefore,  in  the  results 
of  a  census  which  would  show  how  many  people  are  gaining  their 
livelihood  from  trade,  the  number  and  size  of  stores  of  the  various 
classes,  their  geographical  distribution,  and  the  amoimt  of  their 
business. 

Such  trade  statistics  would  give  enlightenment  upon  subjects 
of  general  and  local  concern.  What  is  the  ratio  of  retail  stores  to 
population  ?  Is  the  total  number  or  the  number  of  any  class  of 
stores  increasing  relatively  faster  than  population,  or  is  it  rela- 
tively decreasing  ?  We  can  only  guess.  Some  cities  are  primarily 
jobbing  centers;  their  manufactures  are  comparatively  unim- 
portant. But  through  a  change  in  freight  rates  or  for  other 
causes  their  trade  and  their  prosperity  may  be  slipping  away.  In 
other  cities  the  jobbing  trade  is  rapidly  expanding.  But  all  the 
estimates  of  wholesale  or  retail  trade  now  made  are  apt  to  be 
biased  or  inaccurate  and  are  altogether  inadequate.     Reliable 

^  Quarterly  Publications  of  American  Statistical  Association,  vol.  15,  pp.  62-67. 
Reprinted  by  permission  of  American  Statistical  Association. 


236  BUSINESS  STATISTICS 

information  concerning  the  volume  of  trade  and  the  agencies 
through  which  it  is  carried  on  can  be  obtained  only  by  a  federal 
census. 

The  costs  of  market  distribution  are  by  no  means  light.  Many 
commodities  of  everyday  use,  such  as  cotton  cloth,  clothing,  shoes, 
and  groceries,  ordinarily  yield  the  wholesaler  and  retailer  together 
a  total  gross  profit  of  at  least  30  to  40  per  cent  of  the  retail  price. 
Although,  as  a  rule,  the  wholesale  and  retail  trades  are  not  great 
fortune  makers,  the  total  cost  of  distributing  finished  products  to 
the  consumers  not  infrequently  exceeds  the  amount  paid  for  the 
raw  material  plus  the  costs  of  manufacturing.  With  a  view  to 
economy  attempts  are  continually  being  made  to  shorten  the 
route  from  the  factory  to  the  consumer.  Traditional  market 
methods  are  upset.  A  life  and  death  conflict  ensues.  Twenty 
years  ago  most  of  the  shoes  manufactured  in  the  United  States 
were  handled  by  jobbers;  now  the  proportion  is,  perhaps,  one- 
half  and  shoe  manufacturers  have  even  gone  so  far  as  to  operate 
their  own  retail  stores.  Textile  manufacturers  have  been  dis- 
pensing with  the  services  of  commission  agents.  Some  manu- 
facturers of  goods  retailed  through  grocery  stores  no  longer  sell 
to  wholesalers  but  direct  to  retailers.    "  Trusts  "  have  in  some 

[  instances  either  ceased  to  sell  to  jobbers  or  have  at  least  restricted 
the  amount  of  trade  handled  by  that  class  of  middlemen.  It  was 
the  jobber  and  the  retailer,  not  the  consumer,  who  felt  oppressed 

_bv  the  old  American  Tobacco  Company. 

New  types  of  retailers  —  department  stores,  chain  stores, 
cooperative  societies,  and  mail-order  houses  —  have,  on  the  other 
hand,  become  such  large  scale  purchasers  that  they  have  de- 
manded and  received  jobbers'  discounts.  As  a  consequence  they 
can  undersell  the  small  independent  retailer  and  threaten  his  very 
existence.  Before  this  bitter  strife  reaches  its  cHmax  a  demand 
may  be  heard  for  restrictive  legislation,  such  as  the  department- 
store  taxes  of  the  German  states.  In  fact  some  attempts  have 
already  been  made  to  secure  the  passage  of  a  law  prohibiting  the 
giving  of  rebate  coupons  in  the  retail  tobacco  trade.  The  ques- 
tion of  price  maintenance,  the  right  of  the  manufacturer  to  com- 
pel observance  of  a  fixed  retail  price,  has  not  been  settled  by  the 


SALES  AND  ADVERTISING  STATISTICS 


237 


recent  decision  of  the  Supreme  Court  in  the  Sanatogen  case.  The 
issue  will  attract  more  attention  from  our  legislators  in  the  future 
than  it  has  attracted  in  the  past.  One  of  the  most  forceful 
arguments  in  favor  of  price  maintenance  is  that  it  tends  to  protect 
the  smaller  retailer  against  the  price-cutting  policy  of  the  depart- 
ment stores  and  the  chain  stores.  The  results  of  these  changes  in 
marketing  methods  can,  at  the  present  time,  be  judged  only  in  a 
general  way.  We  have  no  reliable  statistical  information  to  show 
how  far  the  changes  have  gone  nor  what  the  actual  tendencies 
are.  By  giving  us  facts  a  federal  trade  census  would  enable  a 
more  intelligent  consideration  of  the  questions  of  public  poHcy 
involved. 

In  order  to  analyze  their  markets,  manufacturers  and  large 
mercantile  houses  have  sought  statistics  of  the  number  of  whole- 

NuMBER  OF  Retail  Stokes 


Drugs 

Hardware 

Jewelry 

Territory 

List  A 

Lists 

ListC 

List  A 

Lists 

ListC 

List  A 

Lists 

ListC 

United  States . . 
New  York  .... 
Pennsylvania  . . 
Ohio 

43,588 
2,828 
2,342 
1,469 
1,766 
2,518 
407 
991 

45,176 
3,965 
3,315 
2,099 

2,833 

2,407 

406 

1,041 

37,074 
1,830 
2,450 
2,052 
1,787 

2,370 
* 

* 

30,504 
2,005 
1,576 
2,037 
1,967 

1,367 
263 
313 

39,446 
2,636 

2,393 
2,288 

2,995 

1,932 

402 

536 

27,270 

1,430 

1,480 

1,770 

3,320 

1,215 
* 

21,684 

1,544 

1,504 

1,245 

1,152 

908 

250 

309 

20,145 
2,132 
1,702 
1,163 
1,431 
836 

253 
262 

18,249 
1,320 
1,470 
1,230 
1,101 

670 

* 

Illinois  

Missouri 

Maine 

Georgia    

*  Data  not  given. 

sale  and  retail  stores  which  could  serve  as  outlets  for  their  goods- 
To  meet  this  demand,  Usts  have  been  prepared  by  several  agencies, 
samples  of  which  are  given  in  the  table  above.  Although  in 
several  instances  these  lists  correspond  with  each  other  fairly 
closely,  they  are,  in  the  main,  widely  divergent.  List  A  was  pub- 
Kshed  in  the  Mahin  Advertising  Data  Book,  1913;  List  B  in 
Printers'  Ink,  January  18,  191 2;  and  List  C,  in  Advertising  and 
Selling,  April,  191 2. 

These  are  all  reputable  publications  which  would  not  willingly, 
I  think,  circulate  inaccurate  statements.    The  figures  given  here 


238  BUSINESS  STATISTICS 

for  three  trades  in  seven  states  are  typical  in  indicating  the  dis- 
crepancies which  exist  between  all  such  figures.  As  a  brief 
examination  will  show,  the  variations  are  not  uniform.  The  Hst 
with  the  largest  total  for  the  United  States  does  not  give  the 
largest  number  for  each  of  the  individual  states;  note  the  figures 
for  drug  stores  in  Missouri  and  for  jewelry  stores  in  New  York, 
Pennsylvania,  and  Illinois.  And  the  list  with  the  smallest  total 
for  the  United  States  sometimes  has  the  largest  number  for  an 
individual  state;  note  the  figures  for  hardware  stores  in  IlHnois. 
Although  doubtless  due  in  part  to  variations  in  definition,  the 
discrepancies  throughout  are  irreconcilable.  This  is  sufiicient 
answer  to  the  argument  that  the  collection  of  such  information 
should  be  left  to  private  investigations.  In  a  federal  census  the 
definitions  would  be  standardized  and  the  statistics  more  accu- 
rate. The  information  thus  provided  would  be  of  distinct  help  to 
business  men. 

The  only  attempt  at  an  official  collection  of  such  trade  statistics 
was  made  in  the  Massachusetts  census  of  1905.  The  schedule 
was  simple  but  included  several  of  the  questions  which  should  be 
asked  in  the  proposed  federal  census.  No  serious  difiiculties  were 
experienced  in  the  collection  of  the  information.  Nevertheless 
the  results  as  published  have  little  worth.  Largely  because  of  the 
urgency  of  the  work  on  the  population  and  manufacturing  cen- 
suses, which  had  the  right  of  way  over  the  trade  census,  the 
classification  and  tabulation  of  the  trade  statistics  were  not 
satisfactorily  carried  out.  This  was  shown  most  strikingly  in  an 
incongruous  combination  of  wholesale  and  retail  figures.  Despite 
its  non-success,  however,  the  experiment  does  not  indicate  that 
there  are  any  insuperable  obstacles  in  the  way  of  a  federal  trade 
census;  on  the  contrary,  it  makes  the  proposal  appear  more 
practicable. 

It  is  to  be  frankly  recognized  that,  as  in  other  census  work, 
nice  problems  of  definition  and  classification  will  be  encountered. 
There  will  be  omissions  and  duplications,  as  in  the  manufacturing 
census.  In  the  Abstract  of  the  Thirteenth  Census  (p.  514)  it  is 
stated  that:  "  The  figures  for  some  industries  do  not  represent 
»the  total  production,  because  important  establishments  that 


SALES  AND  ADVERTISING  STATISTICS  239 

manufacture  the  same  class  of  products  may  be  included  in  other 
industries.''  Other  qualifications  are  appreciated  by  all  who  have 
had  occasion  to  analyze  carefully  the  census  statistics.  Yet  the 
results  are  generally  accepted  as  approximately  correct,  and  the 
percentage  of  error  would  probably  not  be  higher  in  the  trade 
census.  In  filling  out  some  of  the  schedules  for  the  trade  census 
it  might  be  necessary  to  accept  estimates,  but  it  is  doubtful  if 
this  would  occur  as  frequently  as  in  the  agricultural  census. 

Under  present  conditions  and  with  the  type  of  enumerators 
which  must  be  employed,  it  would  be  a  hopeless  task  to  try  to 
secure  statistics  of  costs  of  store  operation.  The  accounting 
systems  of  large  estabhshments  are  diverse,  and  many  small  stores 
have  only  a  haphazard  system  of  bookkeeping  or  none  at  all. 
The  Bureau  of  Business  Research  of  the  Harvard  Graduate 
School  of  Business  Administration  found  it  essential  to  prepare 
a  uniform  system  of  accounts  before  it  could  obtain  comparable 
figures  for  the  costs  of  retailing  shoes.  Hence,  whatever  the 
federal  government  may  eventually  do  in  this  Hne  of  investiga- 
tion, no  question  about  costs  should  be  included  in  the  schedule 
for  the  first  trade  census. 

The  following  questions  seem  to  be  the  most  important  of  those 
practicable  to  ask:  — 

1.  Kind  of  business  carried  on. 

2.  State  whether  specialty  retail  store,  department  store,  general  store, 

cooperative  store,  mail-order  house,  wholesaler,  jobber,  commission 
merchant. 

3.  Number  of  stores  operated  (i.  e.,  branches). 

4.  What  proportion  of  goods  sold  is  manufactured  by  proprietor. 

5.  Actual  capital,  owned  and  borrowed,  invested  in  the  business. 

6.  Net  cost  of  goods  sold  during  year. 

7.  Total  amount  of  sales  during  year. 

8.  Number  of  employees: 

Male,  16  years  of  age  and  over. 
Female,  16  years  of  age  and  over. 
Children. 
Total. 

The  results  of  the  questions  concerning  the  age  and  sex  of 
employees  would  shed  light  upon  the  labor  conditions  in  certain 
classes  of  stores.    In  addition  some  inquiry  concerning  wages 


240  BUSINESS  STATISTICS 

ought  to  be  made,  the  more  comprehensive  the  better.  Unless 
preliminary  investigation  proved  it  to  be  inexpedient,  it  is  sug- 
gested that  information  be  collected  from  department  stores  and 
general  stores  as  to  the  amount  of  their  sales  of  each  of  several 
groups  of  commodities,  such  as  footwear,  dry  goods,  hardware, 
furniture,  and  groceries  and  provisions.  It  would  be  inadvisable 
to  undertake  to  follow  out  this  line  of  inquiry  in  all  its  possible 
ramifications  but  for  the  broader  classes  significant  statistics 
could  probably  be  obtained. 

/  Practically  all  of  the  argument  in  favor  of  a  census  of  agri- 
/  culture  or  manufactures  apply  also  to  the  proposal  for  a  trade 
'  census,  particularly  since  this  trade  census  does  not  appear  to 
involve  more  serious  statistical  problems  nor  a  prohibitive  cost. 
The  number  of  persons  engaged  in  trade  is  so  great,  their  relation 
to  our  whole  economic  life  is  so  intimate,  the  costs  of  marketing 
are  so  high,  and  such  fundamental  changes  are  taking  place  in 
market  organization  that  we  need  reliable  trade  statistics  which 
can  be  secured  only  through  a  federal  census. 

VIII.  Report  of  Committee  on  Wiring,  National 
Electric  Light  Association  ^ 

The  work  and  report  of  the  Committee  is  this  year  divided  into 
three  parts :  — 

(i)  A  study  has  been  made  to  show  the  amount  of  work 
already  done,  what  is  being  done  and  what  remains  to  be  done 
in  the  wiring  of  buildings. 

(2)  A  report  on  the  various  methods  of  handling  small  custo- 
mers and  reducing  the  expense  of  wiring  for  such. 

(3)  A  report  on  the  question  of  the  standardization  of  plugs 
and  receptacles. 

The  Committee,  in  the  fall  of  1913,  prepared  a  list  of  questions 
arranged  to  bring  out  the  proportion  of  buildings  already  wired 
in  territory  supplied  with  electric  service  and  the  amount  and 
kind  of  business  that  yet  remained  to  be  done. 

1  National  Electric  Light  Association,  Papers,  Reports  and  Discussions,  37th 
Convention,  Commercial  Sessions,  1914,  pp.  308-321.  Reprinted  by  permission 
of  the  National  Electric  Light  Association. 


SALES  AND  ADVERTISING  STATISTICS  24 1 

Instead  of  sending  these  questions  out  broadcast  they  were 
sent  to  a  selected  list  of  reporters  only.  Most  of  the  answers  were 
clear  and  good,  but  some  were  given  in  a  form  which  would  need 
explanation  and  the  answers  to  some  of  the  questions  can  be 
summarized  so  easily  that  instead  of  filling  the  proceedings  with 
all  the  details,  which  would  take  too  much  space,  and  instead  of 
presenting  averages  which  might  be  misleading,  a  general  form  of 
presentation  has  been  adopted.  The  need  of  concealing  the 
individual  figures  of  the  reporting  companies  was  also  a  factor  in 
deciding  on  the  form  of  the  report.     (See  pages  242,  243.) 

Business  So  Far  Obtained 

While  the  business  of  a  company  is  measured  by  dollars  or 
kilowatt-hours,  and  of  a  contractor  by  dollars  or  number  of 
lamps,  yet  since  all  of  these  would  be  affected  by  a  single  big  mill 
or  factory,  another  figure,  namely,  number  of  customers,  has  been 
chosen  for  comparison.  This  is  on  the  ground  that  when  every 
store  and  residence  is  a  customer  the  installation  of  services  and 
the  wiring  of  risers  has  reached  100  per  cent,  and  then  there  is 
nothing  more  to  be  done  to  get  people  who  are  non-users  to 
become  customers,  but  on  the  other  hand  to  obtain  any  further 
business  after  this  point  has  been  reached  needs  a  different  kind 
of  effort. 

Reporters  were,  therefore,  asked  to  give  the  population  sup- 
plied and  the  number  of  customers  for  two  dates,  a  year  apart, 
and  these  have  been  reduced  to  figures  per  1000  population. 

It  is  true  that  some  companies  report  a  customer  using  incan- 
descent lamps,  arc  lamps  or  power  on  separate  meters  as  three 
customers,  while  others  report  several  families  served  through  a 
master  meter  in  an  apartment  house  as  one  customer.  When  a 
company  serves  only  a  business  district  whose  occupants  Hve 
elsewhere,  the  ratio  of  customers  to  population  is  high,  and  other 
such  causes  of  variation  will  occur  to  every  one.  While  these  may 
account  for  some  of  the  extreme  results,  yet  the  general  picture 
is  probably  accurate. 

The  figures  run  from  20  up  to  200  customers  per  1000  popula- 
tion, and  we  have  heard  of  cases  in  this  country  where  it  has  gone 


242 


BUSINESS  STATISTICS 


Tabulation  of  Answers 


Location  and 
Key  Number 

Population 

Customers 
per  1000 
Popula- 
tion! 

Residence 
Customers 
per  1000 
Popula- 
tion! 

New 
Buildings 
per  100,000 
Popula- 
tion' 

Per  Cent 
of  New 

Buildings 
Wired 

Old  Buildings 
Wired  during  a 

Year  Per  Cent 
to  Single  Dwell- 
ings already 

Served  at  Be- 
ginning of  Year 

Over  a 

45 

19 

No.    I  East 

million 

54 

20 

25 
19 

95 

90 

8 

No.    2      « 

(( 

26 

12 

108 

51 

S 

No.    3      " 

u 

26 

12 

88 

30 

16 

90 

2 

Between 

50 

28 

No.    4     " 

100,000  and 
300,000 

70 
50 

44 

50 

322 

100 

20 

No.    5     " 

u 

62 
23 

62 
10 

268 

95 

6 

No.    6     « 

u 

27 
27 

II 

12 

62 

56 

17 

No.    7     " 

u 

Between 

35 
37 

18 

25 

83 

90 

3 

No.    8     « 

50,000  and 
100,000 

42 
26 

29 
II 

202 

85 

21 

No.    9     « 

u 

Between 

32 
58 

16 

33 

44 

90 

36 

No.  lo     « 

20,000  and 
50,000 

66 

72 

38 

55 

4 

No.  II      « 

u 

78 
SO 

60 
29 

26 

100 

4 

No.  12       « 

a 

61 
37 

40 
14 

198 

87 

12 

No.  13      " 

u 

Between 

46 
49 

20 
36 

145 

72 

18 

No.  14     " 

10,000  and 
20,000 
Between 

54 
154 

39 
121 

263 

70 

3/10 

No.  IS  West 

300,000  and 
500,000 

158 

129 

373 

100 

SALES  AND  ADVERTISING  STATISTICS 


243 


Tabulation  of  Answers  (continued) 


Location  and 
Key  Number 

Population 

Customers 
per  1000 
Popula- 
tion* 

Residence 
Customers 
per  1000 
Popula- 
tion* 

New 
Bufldings 
per  100,000 
Popula- 
tion' 

Per  Cent 
of  New 

Buildings 
Wired 

Old  Buildings 
Wired  during  a 

Year  Per  Cent 
to  Single  Dwell- 
ings already 

Served  at  Be- 
ginning of  Year 

Between 

43 

25 

No.  16  West 

30,000  and 
50,000 

62 

40 

2,000 

83 

3 

No.  17 

Between 

42 

No 

Middle 

300,000  and 

45 

figures 

West 

500,000 

given 

No.  18 

Between 

no 

78 

Middle 

100,000  and 

13s 

96 

1,229 

50 

10 

West 

300,000 

No.  19 

Between 

71 

34 

Middle 

20,000  and 

79 

41 

382 

66 

12 

West 

50,000 

No.  20 

22 

9 

Middle 

u 

28 

II 

1,192 

60 

West 

No.  21 

Between 

72 

40 

300 

Middle 

10,000  and 

75 

44 

83 

West 

20,000 

No.  22  West 

Under 
10,000 

209 
169 

165 
^35 

1,647 

85 

3 

No.  23     " 

u 

72 
78 

49 
52 

II 

2 

No.  24     " 

u 

108 
120 

77 
89 

267 

67 

2 

No.  25     " 

a 

82 
87 

72 
84 

555 

96 

10 

No.  26     « 

u 

71 

78 

56 

167 

67 

14 

No.  27     " 

u 

126 
138 

381 

75 

No.  28     « 

III 
109 

80 
82 

24 

50 

4 

No.  29 

Between 

South 

30,000  and 

61 

63 

West 

50,000 

88 

77 

118 

84 

23 

»  The  first  figure  is  for  one  year  earlier  than  the  second. 

s  Single  dwellings.    Apartments  and  stores  not  always  included. 


244  BUSINESS  STATISTICS 

to  225  per  1000.  The  low  figure  of  20  is  in  an  abnormal  district, 
but  apparently  norn.  al  figures  in  the  30's  and  40's  occur  in  some 
of  the  Eastern  cities,  while  high  figures  occur  in  the  Middle  West 
and  West.  Although  225  and  even  200  may  be  abnormal,  there 
are  undoubtedly  numerous  places  with  figures  over  100  up  to  150 
for  actual  development,  without  an  abnormal  reason. 

It  may  be  noted  that  two  European  cities,  viz.,  Strasburg  and 
Milan,  although  old  cities  with  cheap  gas  and  old  buildings, 
already  show  a  development  well  over  150  customers  per  1000 
population. 

Possible  Development 

Every  place  reported  shows  growth  still  going  on.  Reporters 
were  asked  to  estimate  the  limit  of  growth  for  their  cities,  but  it 
was  unfortunately  suggested  that  they  use  a  figure  of  200  per 
1000  population  as  the  limit,  unless  they  had  reason  to  expect 
something  else,  and  practically  every  reporter  either  used  this 
figure  or  was  influenced  by  it.  However,  reporters  were  also 
asked  for  an  estimate  of  the  present  number  of  gas  customers  and 
water  customers  in  their  territory.  Of  course,  many  electric 
companies  have  all  or  some  of  their  lines  in  streets  not  served  by 
gas  or  water,  while  in  many  cases  the  water  supply  to  an  apart- 
ment or  tenement-house  serves  several  potential  electric  cus- 
tomers through  a  single  water-meter.  For  this  reason  the 
electrical  development  in  all  except  the  large  cities  is  well  ahead 
of  gas  development,  and  the  number  of  electric  customers  is  in 
practically  all  cases  more  than  the  nimiber  of  water  customers 
recorded. 

Since  for  this  and  other  reasons  the  figures  of  the  gas  or  water 
customers,  considered  by  themselves  or  per  1000  population,  seem 
to  follow  no  particular  rule,  it  has  not  been  thought  worth  while 
to  report  them,  but  the  number  of  water  customers  sometimes 
reaches  200  per  1000  and  this  points  to  at  least  a  possible  equal 
development  of  the  electrical  business.  The  number  of  gas  cus- 
tomers in  one  or  two  cases  exceeds  the  figure  and  reaches  nearly 
250,  hence  it  is  fair  to  conclude  that  the  final  development  of  the 
electric  business  may  go  up  to  250  customers  per  1000  population, 
and  since  several  places  have  already  reached  150  to  200  even 


SALES  AND  ADVERTISING  STATISTICS  245 

under  present  conditions,  a  figure  of  200  customers  per  1000 
should  not  be  deemed  unreasonable  for  any  company.  Such  a 
figure  may  seem  high  to  companies  that  now  have  only  30,  but 
they  should  remember  that  an  annual  growth  of  even  10  per  cent 
will  increase  this  30  to  200  in  about  twenty  years. 

The  fact  that  growth  of  population  is  different  in  different 
places  would  affect  electrical  growth  somewhat,  cities  whose 
population  grows  fastest  reaching  their  ultimate  electrical 
growth  sooner,  but  even  with  no  growth  of  population  the 
electrical  development  should  ultimately  reach  at  least  200 
per  1000. 

How  Development  Is  Going  On 

All  companies  report  a  growth.  This  growth,  does  not  appear 
to  differ  very  greatly  in  percentage  of  customers  already  served, 
whether  in  cities  that  have  already  reached  a  high  development 
or  in  those  that  have  their  development  before  them. 

If  we  take  200  customers  per  1000  population  as  a  probable 
limit,  a  company  with  50  now  has  a  growth  of  150  more  ahead 
of  it,  and  a  company  with  100  now  has  only  a  growth  of  100  more 
ahead  of  it.  Nevertheless,  the  company  with  100  today  is  just 
as  apt  to  report  a  gain  of  say  10  per  cent  or  10  customers  out  of  a 
possible  100  as  the  other  company  with  50  is  to  report  a  gain  of 
10  per  cent  of  the  old  business  or  only  5  out  of  a  possible  150. 
Of  course  a  limit  must  come  sometime  when  we  shall  get  near  to 
saturation,  but  it  does  not  seem  that  it  will  be  reached  at  any 
figure  below  100. 

This  fact  that  the  gain  in  companies  that  have  reached  dif- 
ferent stages  of  development  is  more  nearly  proportional  to  the 
development  already  reached  than  to  the  number  of  prospects 
would  be  explained  by  the  following:  — 

There  is  a  certain  increase  in  business  that  comes  because  exist- 
ing customers  spread  the  news.  This  is  proportional  to  the  num- 
ber of  customers  ahready  served.  Another  portion  of  the  increase 
comes  as  a  result  of  the  effort  made  by  the  salesmen  or  wiring 
contractors,  and  this  is  proportional  to  the  number  of  potential 
customers  who  are  worked  upon  by  the  salesmen  or  wiring 


246  BUSINESS  STATISTICS 

contractors  and  the  efficiency  with  which  these  men  do  their 
work. 

That  the  growth  actually  recorded  seems  to  be  proportional  to 
the  nimiber  of  old  customers  would  point,  at  first  sight,  to  ineffec- 
tiveness on  the  part  of  the  salesmen,  but  this  does  not  mean  that 
salesmen  do  not  do  their  work  as  well  as  possible,  but  only  that  as 
a  matter  of  fact  there  is  a  large  proportion  of  the  growth  that  is 
independent  of  the  solicitation  done  in  that  particular  year.  The 
salesman's  work  is,  nevertheless,  extremely  important,  since 
whenever  he  does  get  a  customer  he  not  only  accomplishes  that 
particular  result  but  that  customer  spreads  the  news  and  results 
in  other  customers  coming  on  in  later  years  who  would  not  have 
come  if  it  had  not  been  for  the  work  of  the  salesmen  in  getting 
the  first  customer. 

An  important  corollary  from  this  is  that  while  increasing  the 
income  from  an  existing  customer  by  getting  that  particular 
customer  to  use  more  electricity  is  apt  to  show  a  greater  increase 
in  the  income  in  proportion  to  the  effort  spent  than  the  getting 
of  a  new  customer,  yet  the  result  of  the  first  effort  stops  there, 
while  getting  a  new  user  on  the  lines  to  tell  other  non-users  of  the 
advantages  of  electricity  has  a  cumulative  effect  that  goes  on 
until  we  have  100  per  cent  of  development. 

The  next  question  of  interest  is  whether  future  development 
is  to  be  chiefly  from  residence  or  business  places,  and  reporters 
were  asked  to  give  the  number  of  residence  customers  (including 
apartments).  This  number  has  been  reduced  to  figures  per  1000 
population.  As  will  be  noted,  the  number  of  residence  customers 
runs  from  about  40  to  100  per  cent  of  the  whole  number  of 
customers,  the  cases  where  the  number  of  residence  customers 
and  the  whole  number  of  customers  are  equal  being,  of  course,  in 
purely  residential  towns.  Leaving  out  such  anomalies,  the  per- 
centage of  residence  customers  to  the  whole  number  of  customers 
runs  from  40  to  60  per  cent,  where  the  total  number  of  customers 
is  low,  and  up  to  say  80  per  cent,  where  the  development  is  high. 

Putting  the  figures  another  way,  we  find  that  the  number  of 
residence  customers  runs  from  10  to  130  per  1000,  and  the 
balance  (business  places)  runs  from  10  to  30  per  1000  population. 


SALES  AND  ADVERTISING  STATISTICS  247 

The  figures  have  been  given  for  two  successive  dates  and,  as 
will  be  noted,  the  proportion  of  residence  customers  is  increasing 
everywhere  except  in  one  city.  That  is  a  city  where,  for  special 
reasons,  the  total  development  is  as  yet  very  small.  This  only 
brings  out  the  well-known  fact  that  the  early  development  in 
nearly  all  our  cities  is  in  business  places  and  that  most  of  the 
growth  now  going  on  and  most  of  the  future  growth  is  to  be  in 
residences.  Another  method  of  stating  this  is,  that  if  a.  company 
is  growing  10  per  cent  a  year  it  will  find  that  its  business  cus- 
tomers are  growing  at  the  rate  of  only  2  or  3  per  cent,  while  its 
residence  customers  are  growing  at  the  rate  of- 15  to  25  per  cent; 
or,  to  say  that  of  the  net  customers  added  during  a  year  from 
2  out  of  every  3  up  to  9  out  of  every  10  will  be  found  to  be 
residences. 

Development  from  New  Buildings  as  Compared  with  that  from 
Old  Buildings 

The  reporters  were  asked  for  estimates  on  the  number  of  new 
buildings  erected  during  the  year  and  for  the  percentage  of  these 
that  were  wired.  The  figures  of  new  buildings  are  given  in 
numbers  per  100,000  of  population.  The  estimates  from  the 
reporters  in  the  different  cities  show  that  somewhere  in  the  neigh- 
borhood of  80  to  100  per  cent  of  the  new  buildings  are  being  wired 
each  year,  although  a  few  cities  report  lower  figures. 

The  percentage  of  new  buildings  wired  for  any  city  indicates 
a  lower  limit  for  the  possible  growth,  since  if  under  present  con- 
ditions 50,  85  or  100  per  cent  of  the  new  buildings  are  wired  this 
indicates  that  when  every  building  in  the  city  has  been  built  or 
rebuilt  within  say  20  years,  the  company  should  have  50,  85  or 
100  per  cent  of  the  possible  number  of  customers.  Hence,  if  we 
take  200  customers  per  1000  as  a  probable  limit,  a  city  that  is 
getting  50  per  cent  of  the  new  buildings  wired  should  look  forward 
to  an  ultimate  development  of  100  customers  per  1000  popula- 
tion, even  if  its  present  growth  is  very  much  less  than  this,  and  a 
city  which  is  getting  100  per  cent  of  the  new  buildings  wired 
should  look  forward  to  100  per  cent  development,  or  say  200 
customers  per  1000  population. 


248  BUSINESS  STATISTICS 

Old  Buildings 

The  next  figures  the  reporters  were  asked  to  give  were  estimates 
as  to  the  number  of  old  buildings  wired. 

Since  the  increase  in  customers,  whether  from  new  or  old 
buildings,  does  not  seem  to  be  related  either  to  the  number  of 
non-customers  or  to  the  population,  but  to  the  actual  number  of 
existing  customers,  therefore,  in  reporting  the  figures  the  number 
of  old  buildings  wired  has  been  given  as  the  percentage  of  the 
single  dwellings  aheady  served. 

The  reporters  were  also  asked  to  give  the  number  of  old  apart- 
ments wired,  and  the  answers  show  a  pitifully  small  number,  so 
small  that  it  is  not  worth  reporting.  This  is,  however,  natural, 
because  apartments  are  practically  all  renting  propositions  and 
rented  on  moderately  short  leases  or  without  lease.  The  difficulty 
of  getting  rented  buildings  wired  is  well-known.  The  tenant  does 
not  want  to  make  an  investment  for  the  benefit  of  the  landlord 
and  when  rents  are  stationary  the  landlord  is  satisfied  and  does  not 
want  to  take  any  action.  When  rents  are  increasing  the  landlord 
is  more  than  satisfied.  When  rents  are  decreasing  the  landlord 
hesitates  to  put  more  money  into  a  losing  proposition. 

Since,  however,  it  is  an  imdoubted  fact  that  an  occupant  will 
pay  well  for  the  comfort  of  having  electricity,  there  might  be  a 
field  for  some  wiring  company  (which  would  be  really  a  financing 
or  investing  company)  that  would  wire  apartments  whenever  the 
landlord  would  agree  to  allow  the  wiring  company  to  make  a 
charge  to  the  tenant  for  the  wiring. 

We  say  there  might  be  a  field  for  such  a  company,  but  the 
difficulty  is  that  after  a  wiring  company  had  started  to  develop 
such  a  business  the  landlords  would  take  the  cream  and  leave 
only  the  skinmied  milk.  On  the  other  hand,  a  central  station 
should  be  well  able  to  invest  some  thousands  of  dollars  in  the 
wiring  of  houses  that  are  to  be  rented  and  to  allow  the  use  of  such 
wiring  only  at  a  good  rental,  pending  its  sale  to  the  landlord  at  a 
profit.  There  might  be  cases  where  such  wiring  could  neither  be 
rented  nor  sold,  but  these  would  be  few  and  the  loss  would  be  less 
than  the  expense  of  getting  the  rest  of  the  business  in  any  other 
way. 


SALES  AND  ADVERTISING  STATISTICS  249 

Returning  to  the  question  of  whether  the  increase  of  business 
is  coming  from  new  buildings  or  old,  the  numbers  of  buildings  or 
apartments  wired,  new  and  old,  should  be  a  measure  of  the  busi- 
ness gained  during  the  year,  just  as  the  increase  in  actual  number 
of  customers  served  is  a  measure  of  the  new  business.  In  other 
words,  the  new  customers  obtained  should  be  about  the  same  as 
the  total  number  of  places  wired  up. 

The  figures  for  any  given  year  are,  of  course,  not  directly  com- 
parative because  buildings  newly  wired  might  not  come  on  to  the 
system  for  a  time,  and  on  the  other  hand,  there  might  be  an 
increase  in  the  niunber  of  customers  in  buildings  that  were  wL'ed 
in  past  years,  or  from  changes  from  master  meters  to  separate 
meters,  and  vice  versa.  One  company,  for  instance,  showed  an 
increase  of  3000  single-dwelling  customers  during  the  year,  against 
only  2000  such  buildings,  new  and  old,  wired  up  during  the  year. 
On  account  of  such  variations  it  has  not  been  thought  worth 
while  to  give  the  actual  figures  in  the  report  or  in  any  table,  but 
the  increase  in  customers  has  been  compared  with  the  number  of 
new  and  old  dwellings  and  apartments  wired  up,  and  checks  up, 
on  the  whole,  fairly  well.  This  also  shows  that  except  in  a  few 
cases  the  growth  in  the  number  of  customers  for  the  year  is 
accounted  for  almost  entirely  by  the  new  buildings  and  does  not 
come  from  old  buildings. 

Companies  are  getting  most  of  the  new  buildings  and,  further, 
this  accounts  for  most  of  their  growth.  Companies  are  getting 
only  a  very  small  proportion  of  the  old  buildings  that  might  be 
wired  and  this  accounts  for  only  a  small  proportion  of  their 
growth.  For  a  company  that  is  growing  10  per  cent  it  will  be 
found  that  in  many  cases  four-fifths  of  this  growth  is  accounted 
for  by  new  buildings  and  only  one-fifth  by  old  buildings.  How- 
ever, this  must  not  be  taken  as  minimizing  the  importance  of 
soliciting  orders  from  old  buildings. 

The  probable  reason  why  we  get  such  a  large  proportion  of  the 
new  buildings  is  that  they  are  coming  to  us  anyway  without 
much  effort.  If  it  were  possible  to  say  how  many  new  buildings 
we  would  get  without  solicitation  we  should  probably  find  that 
our  salesmen  in  any  doubtful  case  are  really  just  as  effective  on 


2SO  BUSINESS  STATISTICS 

old  buildings  as  on  new.  There  are  cities  reporting  a  really  con- 
siderable number  of  old  buildings  wired,  some  companies  stating 
that  during  a  year  they  have  secured  the  wiring  of  as  many  old 
buildings  as  new.  These  were  cases  of  special  campaigns  or  some- 
times of  changes  in  management.  Even  then,  the  proportion  of 
old  buildings  wired  to  the  number  of  old  buildings  that  might 
have  been  obtained  is  very  small;  i.  e.,  to  get  50  per  cent  of  the 
possible  number  of  new  buildings  shows  up  badly,  while  to  get 
10  per  cent  of  the  possible  number  of  old  buildings  would  be 
wonderful. 

Of  course,  if  a  company  should  once  get  100  per  cent  of  the  old 
buildings  wired  it  would  have  no  work  left  to  do  except  to  get 
new  buildings  and  to  increase  the  use  of  current  among  existing 
customers,  but  there  are  very  few  companies  that  do  not  show  a 
much  bigger  field  for  the  work  of  their  salesmen  among  old  than 
among  new  buildings.  The  number  of  old  buildings  wired  in  any 
year  is  small,  and  yet  this  is  not  because  we  cannot  get  the  old 
buildings.  Every  year  some  old  buildings  are  wired.  With  a 
hard  campaign  more  are  wired.  The  cases  where  a  large  number 
of  old  buildings  have  been  wired  are  almost  all  cases  of  special 
campaigns  or  changes  in  management,  which  have  been  the 
equivalent  of  a  special  campaign. 

If  every  year  we  are  getting  some  old  buildings  wired,  it  is  only 
a  question  of  time  when  they  will  all  be  wired.  It  is  not  a  question 
of  can  we  get  them,  but  of  when  shall  we  get  them,  and  the  harder 
we  try  the  quicker  they  will  come. 

Minimum  Size  of  Customers 

The  reporters  were  asked  for  estimates  as  to  the  minimum  size 
of  customers  that  were  deemed  profitable,  and  the  answers  ran 
about  one-quarter  kilowatt  connected  and  about  $9  to  $18  a  year 
income. 

The  question  of  profit  depends,  of  course,  on  the  average  size 
of  customers  and  how  close  they  are  together,  as  well  as  on  the 
minimum  size.  So  long  as  the  average  size  is  satisfactory,  it  is 
probable  that  even  very  small  customers  bring  in  more  profit  than 
expense.    Likewise  if  customers  are  only  close  enough  together. 


SALES  AND  ADVERTISING  STATISTICS  25 1 

it  is  probable  that  very  small  customers  can  be  profitably  served. 
At  least  the  experience  of  the  gas  companies,  of  the  five  and  ten 
cent  stores,  of  the  Standard  Oil  Company,  and  of  some  European 
and  American  electric  companies  shows  that  if  the  methods  of 
handling  small  customers  are  properly  designed  and  if  there  are 
enough  of  them  close  together,  the  size  of  the  individual  customer 
may  be  very  small  and  yet  the  total  profits  very  large. 

On  the  other  hand  there  is  no  question  that  when  a  customer 
requires  a  $100  service  and  a  meter  all  to  himself  and  yet  has 
only  one-quarter  kilowatt  connected  or  gives  only  $9  a  year 
income,  that  customer  is  worse  than  none.  In  such  cases,  of 
course,  the  customer  should  pay  a  portion  of  the  service  cost,  or 
a  high  minimum. 

IX.   Guiding  Salesmen  by  Map  and  Tack* 

By  W.  a.  Waterbury 

Map  and  tack  systems  are  one  of  the  most  important  equipment 
features  of  offices  which  handle  traveling  salesmen,  selling  agents, 
or  a  more  or  less  extensive  mail  order  business.  They  are  geo- 
graphical charts  that,  in  a  way,  keep  the  management  of  your 
business  under  close  supervision.  They  are  to  the  manufacturer 
or  merchant  as  the  train  charts  are  to  the  train  dispatcher  — 
indicators  showing  what  is  going  on  at  every  critical  point. 

You  can  make  the  map  and  tack  system  show  in  condensed 
form  the  territory  covered  by  your  dealers,  agents  and  traveling 
salesmen.  You  can  use  it  to  lay  out  a  salesman's  route  and  to 
follow  him  as  he  pursues  it.  It  keeps  you  in  constant  touch  with 
his  work  and  lets  you  know  at  all  times  what  he  is  doing  and 
whether  he  is  making  or  losing  money. 

The  map  also  tells  you  at  a  glance  where  prospective  trade  lies. 
It  locates  fields  that  have  not  been  developed.  It  shows  you 
where  collections  are  due,  and  where  advertising  is  producing  the 
best  results.  It  may  be  drawn  upon  for  a  hundred  and  one  other 
points  important  to  your  business. 

1  Library  of  Business  Practice,  vol.  5,  pp.  137-146.  Reprinted  by  permission 
of  A.  W.  Shaw  Company.    Several  forms  have  been  omitted. 


252  BUSINESS  STATISTICS 

As  generally  used,  the  map  and  tack  system  consists  of  one  or 
more  cabinets  of  shallow  drawers,  which  contain  the  maps 
required.  Sometimes  a  single  drawer  is  used  for  a  map  of  a  single 
state;  sometimes  a  drawer  will  contain  only  a  portion  of  a  single 
state  and  at  other  times  two  entire  states,  according  to  the  char- 
acter of  your  business  and  the  money  you  can  afford  to  put  into 
the  equipment. 

Tacks  with  different  colored  heads  and  balls  of  different  colored 
twine  are  used  in  connection  with  the  maps  to  indicate  different 
business  conditions. 

This  is  the  simplest  form  of  a  map  and  tack  system.  Probably 
no  two  concerns  apply  it  in  exactly  the  same  manner.  The 
equipment  is  merely  the  foundation  and  may  be  regarded  as  the 
tool  with  which  to  work. 

I  have  found  my  way  of  operating  the  system  to  be  simple  and 
practical.  Anyone  can  put  it  into  practice  at  any  time  without 
conflicting  with  other  interests. 

I  will  take  as  an  example  my  company,  which  employs  fifty  to 
a  hundred  salesmen  to  handle  and  sell  a  marketable  article  that 
is  in  more  or  less  demand  in  all  parts  of  the  country.  In  addition 
to  the  salesmen  on  the  road,  I  have  a  resident  sales  organization 
of  dealers  and  agents  who  are  under  contract  to  handle  my  line  of 
goods  and  who  have,  imder  the  contract,  exclusive  rights  to  the 
sales  in  their  territories.  These  agents  are  scattered.  Some 
control  a  single  town  or  city,  others  an  entire  county,  and  some  a 
state- 
As  I  have  no  right  to  operate  in  districts  allotted  to  exclusive 
agents,  I  have  to  keep  my  traveling  salesmen  out  of  their  terri- 
tory. In  order  to  do  this,  it  is  important  that  exclusive  territories 
be  designated  on  the  maps.  I  give  an  exclusive  contract  to  a 
resident  agent  or  dealer  who  can  secure  more  business,  or  the 
same  amount  of  business,  at  less  cost  than  I  can  through  my 
traveling  men.  It  is  vital  that  I  keep  myself  informed  of  his 
productiveness  and  prevent  it  from  diminishing.  To  do  this  I  use 
white  tacks. 

A  white  tack  indicates  an  exclusive  agent.  If  he  controls  a 
town  or  city,  a  single  white  tack  inserted  at  that  point  on  the  map 


SALES  AND  ADVERTISING  STATISTICS  253 

is  sufficient.  If  he  covers  a  county  or  large  territory,  a  line  of 
white  tacks  along  the  county  or  territorial  boundaries,  a  black 
string  connecting  them,  and  a  white  tack  to  mark  the  agent's 
headquarters  in  a  town  or  city,  show  the  district  covered  and  the 
permanent  address  of  the  man  in  charge.  If  a  territory  has  more 
than  one  agent,  two  white  tacks  indicate  the  fact. 

It  is,  of  course,  essential  that  there  should  be  a  way  of  naming 
agents  by  inspecting  the  map.  An  index  card  for  each  agent 
supplies  this  information.  A  drawer  in  a  card  cabinet,  sub- 
divided according  to  states,  cities  and  names,  will  hold  the  cards. 
The  cards  appear  under  the  names  of  the  cities  tacked  in  white 
and  contain  the  names  and  addresses  of  the  agents  and  a  descrip- 
tion of  the  territories.  Duplicate  cards  containing  only  the  names 
and  addresses  are  kept  separately  with  the  cards  of  all  the  other 
agents,  arranged  alphabetically  by  names. 

One  glance  at  the  map  shows  the  territory  controlled  by  an 
exclusive  agent.  Reference  to  the  first  card  filed  under  the  name 
of  the  city  he  uses  as  headquarters  shows  who  he  is  and  the  terri- 
tory he  controls.  The  second  card  gives  only  his  name  and  address. 
It  is  the  cross  index  and  locates  the  territory  and  address  of  an 
agent  who  is  mentioned  only  by  name  in  correspondence.  Ref- 
erence to  the  map  makes  the  information  about  him  complete. 

On  receipt  of  an  inquiry  I  consult  the  map  and  the  town  or  city 
that  furnished  the  prospect.  The  original  inquiry  is  given  a 
number,  and  all  future  dealings  or  correspondence  with  the 
inquirer  is  conducted  under  that  number.  An  index  card  which 
carries  the  name  and  address  of  the  prospect  is  given  a  corre- 
sponding number.  We  do  not  file  correspondence  about  pro- 
spective business  in  the  general  office  file  until  the  inqiurer  has 
been  sold,  but  file  it  separately  and  by  consecutive  numbers.  The 
number  of  the  card  acts  as  a  guide  for  locating  the  correspondence. 
These  cards  are  filed  alphabetically  by  states,  cities,  and  names. 

As  soon  as  a  prospect  has  been  secured,  the  city  tacked  in  black, 
a  number  given  and  an  index  card  filled  out,  I  send  circular 
matter,  prices  and  other  necessary  information.  Two  carbon 
copies  of  the  letter  are  made.  The  stenographer  attaches  one  to 
the  original  communication  for  temporary  filing,  and  forwards  the 


2S4  BUSINESS  STATISTICS 

other,  with  an  appropriate  letter,  to  the  agent  controlling  the 
territory  from  which  the  prospect  answered.  I  never  send  the 
original  communication  to  an  agent,  but  write  a  reply  worded  so 
that  he  can  understand  the  purport  of  the  original  inquiry.  If 
this  is  ambiguous,  I  attach  a  copy  of  the  inquiry. 

The  black  tack  remains  in  the  map  until  the  resident  agent 
notifies  the  home  ofiice  of  a  sale.  After  a  sale  it  is  removed  and  a 
blue  tack  substituted.  If  the  cards  show  other  prospective  busi- 
ness in  the  same  city,  both  blue  and  black  tacks  appear.  The 
proper  index  card  is  marked  "  sold  "  and  transferred  to  the  back 
of  all  cards  in  that  state  into  a  "  sold  "  compartment.  The 
compartment  is  arranged  alphabetically  under  customers'  names. 
The  correspondence,  which  can  be  located  by  the  number  on  the 
card,  is  removed  from  the  numerical  file  and  transferred  to  the 
general  file. 

Thus  a  black  and  blue  tack  indicates  business  accomplished  and 
work  still  to  be  done,  and  reference  to  the  cards,  the  correspond- 
ence and  the  "  sold ''  cards,  shows  instantly  the  prospective  trade 
and  the  sales.  A  summary  of  the  business  done  in  any  town  can 
be  conveniently  kept  on  a  card  in  the  "  sold  "  file.  In  this  manner 
the  amount  of  business  done  by  any  agent  for  any  period  of  time 
can  be  quickly  ascertained. 

Sometimes  it  is  difficult  to  induce  the  agent  to  notify  you  when 
he  makes  a  sale  to  a  prospect  you  have  referred  to  him.  Usually 
a  reminder  will  secure  action.  A  monthly  statement  of  the  sales 
enables  you  to  tack  up  the  maps,  add  to  your  cards  and  assemble 
a  complete  statement  of  the  business  done  in  an  agent's  territory. 

X.  Determining  the  Value  of  Salesmen  ^ 

By  Donald  L.  Kinney 

A  STAR  salesman  for  a  wholesale  crockery  house  came  into  the 
sales  manager's  office.  "  Mr.  Stewart,"  he  said,  "  I  must  have 
more  money  next  year.  My  sales  have  been  $20,000  more  this 
year  than  last,  and  my  expenses  have  increased  only  one-half  of 
one  per  cent."    He  got  the  raise. 

^  System,  April,  1910,  pp.  402-406.     Reprinted  by  permission  of  System. 
Forms  omitted. 


SALES  AND  ADVERTISING  STATISTICS  255 

Then  came  another.  "  Mr.  Stewart/*  this  salesman  ventured, 
"  I  think  I  ought  to  have  more  money  next  year.  Of  course,  I 
know  that  I  haven't  sold  much  more  this  season  than  last,  but  I 
have  been  with  you  fifteen  years.  I  went  out  to  that  territory 
when  you  didn't  have  an  account  in  the  state.  I  have  built  up 
such  a  good  will  for  the  house,  that  I  believe  the  mail  order  sales 
from  my  territory  will  exceed  those  from  the  territory  of  anyone 
else  on  the  force." 

But  Stewart  did  not  know  this,  or  if  he  did,  he  probably  believed 
that  the  house  was  as  largely  responsible  for  the  good  will  as  the 
salesman.  Stewart  had  a  rather  firmly  rooted  idea  that  a  sales- 
man's value  to  the  house  is  determined  by  a  single  problem  in 
division  —  total  selling  expenses  divided  into  total  sales  gives 
percentage  of  selling  cost.  By  this  process  Stewart  found  that 
this  salesman's  percentage  was  a  trifle  higher,  and  his  total  sales 
considerably  lower  than  those  of  the  star.  Result  —  this  salesman 
did  not  get  his  raise. 

Now  Burke,  a  competitor  of  Stewart  located  two  blocks  away, 
had  the  same  requests  under  similar  conditions  from  two  of  his 
salesmen.  But  in  this  case,  the  star  was  refused  the  raise,  while 
the  apparently  poorer  salesman  secured  a  substantial  increase. 
And  in  spite  of  this  seeming  reward  of  mediocrity  at  the  expense 
of  ability,  Burke  is  the  keener  sales  manager.  The  card  index  in 
his  desk  showed  that  although  the  star  salesman  had  sold  more 
goods  than  any  other  man  in  the  house,  and  his  expenses  were  as 
low  as  the  rest,  his  nel  profit  to  the  house  was  considerably  below 
the  standard.  He  had  concentrated  his  efforts  on  the  staples 
which  ran  into  big  figures  but  yielded  small  profits.  The  other 
salesman  had  devoted  his  time,  to  the  more  profitable  specialties, 
which  held  down  his  gross  sales,  but  increased  his  net  value  to  the 
house.  Burke's  cards  showed  this  fact  and  this  salesman  got  the 
raise. 

These  two  business  houses  are  typical  of  two  classes.  One 
weighs  its  salesman  with  gross  sales  and  a  hazy  appreciation  of  the 
good  will  for  which  the  salesman  is  responsible.  The  other  type 
of  business  house  appraises  its  salesman  with  the  standard  of 
net  profit  and  a  definite  analysis  of  the  salesman's  good-will 


256  BUSINESS  STATISTICS 

patronage.  Houses  of  this  character  have  a  measuring  stick 
which  enables  them  to  point  to  each  salesman's  position  on  the 
scale  of  efficiency. 

Two  factors  determine  the  salesman's  value:  his  net  profit  to 
the  house,  as  shown  by  actual  figures;  and  his  trade  building 
ability  as  reflected  by  mail  orders,  a  continued  patronage  and 
good  will  as  shown  by  the  trade's  attitude  toward  the  house  in 
their  letters  and  conventions.  The  first  of  these  is  an  accounting 
proposition  and  can  be  made  as  accurate  as  figures  will  allow. 
The  second  deciding  factor  combines  record  keeping  and  a  culti- 
vated ability  on  the  part  of  the  employer  to  determine  how  much 
his  salesmen  are  worth  to  him  as  business  builders.  Both  of  these 
factors  must  be  appUed  to  outside  and  inside  salesmen  —  the 
men  who  distribute  goods  for  the  manufacturer,  the  jobber,  and 
the  retailer. 

In  order  to  secure  figures  which  show  the  net  profit  of  salesmen, 
any  industry  must  be  divided  first  into  several  departments. 
The  number  will  depend  on  the  volume  of  business.  A  large 
manufacturer  or  wholesaler  might  need  a  score  of  departments 
while  the  needs  of  a  small  retailer,  with  a  half  dozen  clerks,  would 
be  satisfied  with  two  or  three  divisions. 

The  departmentalizing  of  your  business  is  absolutely  necessary 
as  a  first  step.  Grouped  sales  show  from  which  department  your 
men  are  making  money  for  you.  They  also  enable  you  to  deter- 
mine which  departments  are  more  profitable  than  others. 

A  manufacturing  chemist  with  six  departments  finds  that  three 
forms  are  all  that  is  necessary  to  secure  the  sales  data.  On 
the  salesman's  order  sheet  are  entered  all  the  items  as  finally 
billed  out  to  the  customer.  In  addition  to  the  data  provided  for 
in  the  columns  the  cost  of  each  item  is  written  in  the  proper  place 
together  with  a  certain  percentage  allowed  for  overhead  cost. 
When  this  sheet  has  been  received  at  the  house  and  attended 
to  by  the  order  department,  where  it  is  totaled  and  numbered, 
the  results  shown  are  posted  to  the  salesman's  analysis  sheet. 
The  order  invoice  number  and  name  of  customer  is  enterecj"  at 
the  left,  and  then  under  the  six  succeeding  departments  are 
listed  the  selling  prices  of  the  various  items  which  appear  in  the 


SALES  AND  ADVERTISING  STATISTICS  257 

order.  In  the  adjoining  six  columns  is  listed  the  net  profit  on 
each  item.  This  includes  accurate  overhead  charges  secured 
from  the  cost  records;  and  sales  expense,  secured  from  the  sales- 
man's expense  account.  Under  the  heads  "  total  sales  "  and 
"  total  profits  "  are  entered  the  amount  of  the  invoice  and  profit 
to  the  house  on  this  sale. 

At  the  end  of  each  month  these  figures  are  classified  and 
transferred  to  the  summary  sheet.  On  this  sheet  in  the  spaces 
opposite  each  salesman's  name  are  entered  the  number  of  days 
the  salesman  was  out,  average  daily  sales,  total  expense,  average 
daily  expense,  cost  to  sell  and  total  sales  in  all  departments. 
In  the  next  columns  are  listed  the  total  profit  this  salesman  has 
made  for  the  house  in  each  department  and  total  profit  in  all 
departments. 

With  these  figures  before  him,  the  sales  manager  knows  pre- 
cisely how  much  money  each  salesman  is  making  for  the  house. 

But  this  sales  manager  is  broad  enough  to  know  that  figures 
may  lie.  He  knows  that  second  to  the  goods'  quality,  the  sales- 
man is  the  first  factor  in  building  trade.  Accordingly,  this  sales 
manager  has  all  indirect  orders  classified  by  salesmen's  territories. 
These  orders,  together  with  the  net  figures  secured  by  the  method 
just  described,  and  a  proper  appreciation  of  the  good  will  which 
the  salesmen  have  built  up  for  the  house,  give  the  sales  manager 
an  accurate  basis  for  determining  the  exact  worth  of  his  salesmen. 

In  a  wholesale  business  where  the  distribution  of  goods  to 
retailers  demands  a  large  number  of  salesmen,  the  need  for  a 
method  of  determining  the  value  of  salesmen  is  even  greater  than 
in  a  manufacturing  business  whose  salesmen  are  specialty  men, 
calling  only  on  the  jobbing  trade.  One  of  the  large  wholesale 
grocery  houses,  employing  nearly  one  hundred  and  fifty  salesmen, 
has  developed  a  remarkable  system.    It  is  simple  and  efiicient. 

When  an  order  has  been  filled  and  0.  K.'d  by  the  order  de- 
partment, it  is  sent  to  the  accounting  department.  The  various 
items  on  the  order  are  not  grouped  by  departments,  so  the 
order  is  first  handed  to  a  boy  who  indicates  in  colored  ink  the 
nimibers  of  the  departments  to  which  credit  should  be  given  for 
the  various  items  in  the  order. 


258  BUSINESS  STATISTICS 

When  this  is  done,  the  order  is  turned  over  to  another  person 
in  the  accounting  department  who  enters  in  the  first  two  columns 
of  the  order  sheet  the  cost  and  profit  of  each  item.  The  items 
are  then  grouped  on  the  salesman's  individual  analysis  sheet, 
the  colored  department  numbers  on  each  item  guiding  the  clerk 
as  to  which  division  each  item  should  be  entered  under.  This 
clerk  enters  on  the  first  two  divisions  of  the  analysis  sheet  the 
salesman's  gross  sales  in  each  department.  In  the  next  two 
divisions  he  enters  the  net  profit  on  each  item. 

From  this  analysis  sheet  a  clerk  draws  off  the  total  sales  and 
profits  each  day  and  enters  them  on  a  temporary  sheet.  When 
these  have  been  proved  correct,  and  have  been  posted  to  a  ledger, 
he  transfers  the  totals  to  a  large  summary  sheet.  This  sheet  is 
vertically  ruled  to  show  the  names  of  salesmen,  the  number  of 
each  department  and  the  articles  sold  in  each.  The  horizontal 
rulings  give  spaces  for  entering  the  total  gross  sales  and  profits. 
The  salesmen's  names  are  entered  alphabetically  in  the  first 
column.  In  the  spacing  directly  opposite  are  entered  the  depart- 
ments and  the  gross  sales  and  profits  in  each. 

The  salesman's  record  is  completed  when  his  gross^sales  and 
percentage  of  net  profit  for  the  month  have  been  entered  as  indi- 
cated in  the  sales  manager's  card  index. 

The  figures  shown  on  these  records  form  the  first  basis  for 
weighing  every  salesman  in  the  organization  of  this  wholesale 
house.  The  figures,  however,  are  supplemented  by  others  show- 
ing the  same  statistics  for  all  mail  orders,  for  which  the  salesman 
receives  full  credit. 

But  these  figures  do  more  than  merely  determine  the  value  of 
salesmen  or  departments.  The  salesmen's  cards  are  kept  up  to 
date  each  month  and  are  constantly  before  the  sales  manager. 
When  he  notices  in  May  that  Salesman  Jones  is  falling  down  on 
gross  sales,  he  immediately  gets  after  him  and  boosts  him  back 
toward  his  record. 

The  next  card  may  show  that  jvhile  Salesman  Smith's  gross 
sales  have  increased  over  those  of  the  two  previous  months,  his 
net  profit  has  fallen  below  the  standard.  When  that  salesman 
comes  in  at  the  end  of  the  month  or  before,  the  sales  manager 


SALES  AND  ADVERTISING  STATISTICS  259 

takes  him  to  the  monthly  summary  sheet  and  shows  him  why  he 
is  not  making  the  money  for  the  house  that  he  should. 

This  sales  manager  uses  these  records  constantly.  Although 
the  accounting  costs  his  house  $io,cx)o,  the  facts  obtained  pay 
for  themselves  ten  times  over. 

In  the  retail  store,  the  counter  salesman  must  be  put  through 
the  same  acid  tests.  He  must  first  make  a  satisfactory  net  profit 
for  the  house.  He  must  also  be  a  trade  builder  —  a  clerk  who, 
through  his  own  efforts,  will  draw  trade  to  the  store  year  after 
year.  And  the  retailer,  like  the  manufacturer  and  wholesaler, 
may  find  that  a  salesman's  value  is  not  always  determined  by 
figures. 

Several  months  ago,  the  manager  of  a  retail  shoe  store,  employ- 
ing nearly  fifty  salesmen,  hired  a  new  clerk.  Before  the  end  of  the 
month,  he  saw  from  the  sales  slips  and  weekly  summary  sheets 
that  the  new  man  was  distancing  salesmen  who  had  been  in  his 
employ  a  dozen  years. 

Apparently,  here  was  a  magician  who  deserved  an  immediate 
reward  of  at  least  a  fifty  per  cent  increase  in  salary.  But  this 
manager  was  a  veteran,  and  knew  that  these  astounding  figures 
could  be  neutralized.  He  started  an  inmiediate  investigation, 
and  the  next  morning  the  star  salesman  was  closeted  with  the 
manager,  who  told  him  in  emphatic  terms  that  he  must  either 
change  his  selling  tactics  at  once  or  leave  the  organization. 

This  salesman  had  the  faculty  of  "  sizing  up  a  customer." 
Usually,  he  could  determine  a  slow  buyer  as  soon  as  he  crossed  the 
threshold.  These  he  avoided,  to  concentrate  his  efforts  on  quick 
sales.  When  he  did  get  a  customer  who  took  a  half  hour  in  search 
for  foot  comfort,  he  would  turn  him  over  to  the  usher. 

"  This  man  can  be  sold,"  he  would  say,  "  but  I  can't  seem  to 
suit  him.  I  think  one  of  the  other  boys  could  make  the  sale." 
And  while  another  man  was  taking  one-sixteenth  of  his  day's 
working  time  to  please  a  difficult  customer  and  build  trade  for 
future  years,  the  star  salesman  was  making  three  or  four  "  quick 
sales." 

The  sales  manager  of  this  shoe  firm  receives  weekly  slips  show- 
ing the  number  of  "  returns  "  made  on  a  salesman  and  the  num- 


26o  BUSINESS  STATISTICS 

ber  made  to  him.  One  month  the  manager  observed  a  certain 
salesman  had  an  extraordinary  number  of  returns  made  on  him. 
Examining  the  slips  of  this  salesman  and  those  of  the  salesman 
who  fitted  the  customers  again,  the  manager  found  that  in  every 
instance  the  customers  secured  larger  sizes  at  the  second  call. 
The  manager  then  knew  that  this  salesman  was  fitting  too  snugly 
and  took  steps  to  correct  the  tendency.  By  such  means  the  man- 
ager judges  the  salesman's  ability  to  sell  satisfaction,  and  to  him 
such  ability  greatly  discounts  big  totals,  for  dissatisfaction  is  a 
poor  advertisement. 

In  a  large  department  store  employing  hundreds  of  clerks,  the 
classification  of  sales  involves  more  details,  but  is  secured  in 
practically  the  same  way  as  described  for  the  manufacturing  and 
wholesale  industries.  Each  evening  the  various  cashiers  send 
their  cash  and  credit  slips  to  the  auditing  department  where 
clerks  classify  the  slips  by  departments.  The  total  cash  and 
credit  sales  are  then  entered  on  a  distribution  sheet  which  must 
check  with  the  cash  posting  sheet. 

While  the  clerks  are  classifying  the  sales  slips  by  stores  and 
cashiers,  they  also  classify  them  by  salesmen.  The  total  sales  of 
each  clerk  are  secured  once  a  month  with  adding  machines  and 
entered  on  long  sHps  of  paper  which  show  the  store  number, 
date,  number  and  name  of  clerk,  salary,  days  worked,  total  sales, 
daily  average  and  percentage.  These  are  sent  to  another  division 
of  the  auditing  department  where  they  are  used  as  the  basis  for 
making  up  a  monthly  summary  sheet.  This  sheet  is  ruled  to 
show  the  store,  the  number  and  stock  carried,  clerk's  name 
and  number,  wages,  days  worked,  sales,  daily  average  and  per- 
centage. 

These  figures  are  shown  for  the  twelve  months,  and  at  the  end 
of  the  year,  the  yearly  totals  are  added  and  entered.  The  clerks' 
names  are  entered  on  these  sheets  alphabetically,  and  their 
monthly  record  of  sales  stands  as  the  accurate  standard  for 
determining  their  value  to  the  house. 

Net  profit  and  good  will  —  these  are  the  two  factors  which 
must  be  balanced  in  weighing  every  salesman,  whether  he  works 
behind  a  counter  or  over  a  sample  case. 


SALES  AND  ADVERTISING  STATISTICS  26 1 

XI.  Records  Salesmen  Like  ^ 

By  K.  K.  Bell 

I  LIKE  to  say  that  I  have  seventy  bookkeepers  to  handle  the 
records  of  one  hundred  salesmen.  That  is  not  literally  true,  of 
course,  because  not  all  of  the  seventy  are  bookkeepers,  but  it  is 
strictly  correct  to  say  that  I  have  seventy  people  who  keep 
records  for  one  hundred  salesmen. 

And  even  at  that,  we  are  not  over-supplied  with  records.  Sell- 
ing costs  with  us  have  not  gone  up  —  that  is,  net  selKng  costs. 
If  anything,  they  are  slightly  lower  than  they  were  five  years  ago. 
Volume  accounts  for  the  decrease,  and  it  is  for  the  purpose  of 
getting  the  volume  that  we  have  so  many  office  people  watching 
the  work  of  our  salesmen. 

While  the  net  selling  cost  has  decreased  with  us,  this  does  not 
mean  that  it  is  growing  easier  to  sell.  On  the  contrary,  I  am  con- 
fident it  is  becoming  every  year  more  and  more  necessary  to  dig 
deep  beneath  the  surface  of  sales  territories.  We  once  purposely 
sent  our  salesmen  out  for  a  hasty  run  over  large  territories.  They 
were  able  merely  to  scratch  the  surface.  This  method  of  selling, 
indeed,  brought  results  and  quick  profits,  but  in  the  long  run  it 
did  not  bring  increased  returns. 

Intensive  methods  of  selling,  however,  do  that  very  thing.  And 
we  have  found  in  our  business  that  the  deeper  you  go  into  a  sales 
territory,  the  more  possibilities  you  find  for  the  development  of 
sales.  I  think  an  outline  of  our  methods  of  watching  sales  will 
prove  interesting  to  nearly  everybody,  simply  because  it  is  getting 
harder  to  sell,  and  a  solution  must  be  found. 

Our  records  begin  with  the  salesman  himself.  His  daily  report 
sheet  is  made  out  with  a  great  deal  of  care.  We  require  a  good 
many  details.  On  the  other  hand,  we  provide  a  report  sheet 
which  enables  him  to  report  these  details  without  much  difficulty. 

Every  dealer  in  the  country  who  can  handle  our  goods  is  on  our 
list.  Our  territories  are  so  arranged  that  the  salesmen  will  call  on 
every  one  of  these  dealers  on  an  average  of  three  times  a  year. 

*  System,  February,  1916,  pp.  198-201.  Reprinted  by  permission  of  System. 
Mr.  Bell  is  sales  manager  of  the  Calumet  Baking  Powder  Company.  Forms  omitted. 


262  BUSINESS  STATISTICS 

Quotas  are  set  for  every  territory.  We  go  even  farther  than  that, 
however,  and  get  separate  quotas  for  every  district,  state,  county, 
town,  and  dealer. 

Our  quotas  are  based  on  population.  We  figure  how  many 
cans  of  baking  powder  should  be  used  in  a  year  by  each  group  of 
one  hundred  people;  and  on  this  basis  we  figure  out  what  the 
total  consumption  of  baking  powder  in  the  country  is.  Then  we 
figure  the  percentage  of  this  total  consumption  which  we  think 
our  company  should  get.  Worked  out  in  detail,  this  gives  us  the 
amount  we  should  be  able  to  sell  to  every  dealer  in  every  part  of 
the  country. 

Salesmen  are  routed  very  carefully  from  the  home  ofiice  and  we 
instruct  them  not  to  deviate  from  the  prearranged  plan,  except  in 
unusual  cases.  As  I  said  before,  they  are  required  to  call  on 
every  dealer.  In  cases  where  they  are  not  able  to  see  the  dealer 
himself,  they  are  required  to  report  the  exact  circumstances 
which  prevented  them  from  seeing  him.  This  plan  gives  us  a  very 
complete  hold  on  all  possible  sales  of  baking  powder  in  the  whole 
country. 

The  salesmen  themselves  are  backed  up  by  two  experienced 
correspondents  in  the  home  office.  These  correspondents  have  at 
hand  all  the  data  regarding  dealers  on  whom  the  salesmen  them- 
selves could  not  call,  or  to  whom  they  were  unable  to  sell  goods. 
They  spend  their  entire  time  writing  personal  sales  letters.  The 
results  of  this  second  process  of  covering  territories  with  a  fine- 
tooth  comb  are  splendid.  Each  of  these  correspondents  makes 
more  sales  in  the  course  of  a  year  than  any  one  of  the  salesmen  in 
the  field. 

In  the  group  of  columns  under  the  word  "  sales,"  on  the  daily 
report  form  which  is  used  by  the  salesmen,  the  actual  transac- 
tions of  the  day  are  recorded.  Four  columns  follow  this  and  the 
salesman  enters  in  the  proper  places  what  brands  of  products  are 
first,  second,  and  third  best  sellers  in  each  merchant's  store.  The 
final  column  enables  the  salesman  to  report  any  cases  where  he 
could  not  make  a  sale.  He  can  give  his  information  very  briefly. 
The  correspondent  knows  what  kind  of  a  letter  to  write  in  order 
to  line  up  the  merchant  for  possible  sales. 


SALES  AND  ADVERTISING  STATISTICS  263 

On  the  back  of  this  report  sheet  the  salesman  adds  informa- 
tion of  interest  to  the  advertising  department.  He  notes  very 
briefly  exactly  what  kind  of  assistance  he  gave  to  the  advertising 
department  in  connection  with  the  advertising  of  individual 
merchants. 

Our  salesmen,  of  course,  are  instructed  to  help  the  dealers 
wherever  they  can  by  distributing  such  devices  as  will  help  the 
sale  of  our  product,  and  also  by  suggesting  window  trims,  methods 
of  display,  and  the  like.  It  is  essential  that  the  advertising 
department  should  keep  in  touch  with  this  work.  The  salesman's 
report  makes  it  possible  for  them  to  do  so. 

Expense  accounts  are  also  turned  in  by  the  salesmen  daily. 
Here,  as  in  the  daily  report  of  sales,  we  try  to  make  it  easy  for  the 
salesmen  to  record  the  facts  which  we  must  know,  and  at  the 
same  time  simple  for  us  to  summarize  the  expense  in  the  office. 

Each  week  every  salesman  receives  a  new  expense  book.  It  is 
convenient  in  size  and  he  can  easily  slip  it  into  a  coat  pocket. 
Columns  provide  space  in  which  he  can  enter,  without  unneces- 
sary writing,  what  he  spent  money  for  in  the  company's  interest. 
On  the  stub  he  can  record  the  total  amount  of  his  day's  expenses. 

The  slip  itself  is  torn  off,  attached  to  the  daily  sales  report  and 
mailed  to  the  home  office  every  night.  At  the  end  of  the  expense 
book  is  a  space  in  which  the  salesman  can  enter  a  summary  of  his 
sales  for  the  week,  itemized  by  dealers.  On  the  outside  of  the 
back  cover  is  his  route  schedule  for  the  week,  showing  the  towns 
he  is  to  visit. 

At  the  end  of  each  week  the  salesman  sends  his  book  to  the 
home  office  and  the  totals  carried  on  the  stubs  in  the  book  must 
agree  with  the  total  of  his  daily  reports  of  expenses. 

We  have  found  that  this  careful,  daily  handling  of  expenses 
makes  the  salesman  himself  more  systematic  and  that  it  also  saves 
the  house  an  amount  of  money  which  is  well  worth  conserving. 

We  make  a  summary  of  sales  for  each  salesman  every  month 
and  write  the  summary  on  a  card.  Each  card  contains  the  report 
of  all  the  salesmen  in  one  state.  In  addition  to  giving  the  sales- 
man's record  for  the  month  of  the  current  year,  it  also  gives  his 
record  for  the  same  month  in  the  previous  year. 


264  BUSINESS  STATISTICS 

We  make  a  somewhat  more  elaborate  summary  at  the  end  of 
each  year.  This  form  shows  the  salesman's  quota  for  the  year, 
his  reported  sales  for  the  current  year  and  the  previous  year,  the 
details  of  each  trip,  shipments  for  the  year,  and  the  open  contracts 
outstanding  at  the  end  of  the  year. 

This  information  is  given  for  each  town  in  the  salesman's  terri- 
tory. We  can  therefore  very  quickly  check  up  where  he  has  been 
doing  better  and  where  he  has  not  been  doing  so  well  as  in  the 
previous  year. 

The  salesmen  are  judged  in  three  ways,  as  follows: 

(i)  By  their  quota. 

(2)  By  the  effectiveness  of  their  distribution. 

(3)  By  the  number  of  five  and  ten-pound  cans  sold. 

A  "  hundred-point  man  "  is  one  who  makes  his  quota,  secures 
what  we  consider  a  one-hundred-per-cent  distribution,  and  sells 
as  many  five  and  ten-pound  cans  as  an  even  balance  of  our  busi- 
ness requires.  Salaries,  of  course,  are  adjusted  on  the  basis  of 
these  three  considerations. 

Our  plan  is  simply  based  on  the  truth  which  I  believe  is  being 
widely  recognized —  that  the  more  closely  you  work  a  territory, 
the  better  results  you  will  get  out  of  it.  Farmers  in  the  old 
country  as  a  rule  get  much  larger  crops  from  an  acre  of  ground 
than  we  average  in  this  country.  The  reason  is  that  ground  is 
limited  over  there,  while  in  this  country  we  have  been  —  in  the 
past  —  free  to  pick  and  choose. 

It  used  to  be  that  we  could  pick  and  choose  in  the  same  way  in 
selling  goods.  That  day  is  rapidly  passing,  and  the  necessity  is 
more  and  more  insistent  that  we  dig  deep  —  and  not  merely 
scratch  the  surface. 

XII.   Graphs  for  the  Sales  Manager* 

By  Stanley  G.  Tarrant 

When  the  general  manager  of  a  roofing  company  found  it 
necessary  to  be  absent  on  business  in  San  Francisco  for  nearly 
three  months  last  year,  he  selected  from  the  reports  which  came 

1  System,  December,  1915,  pp.  648-649.  Reprinted  by  permission  of  System. 
Charts  omitted. 


SALES  AND  ADVERTISING  STATISTICS  265 

to  his  desk  those  that  he  wanted  forwarded  to  him  to  help  him 
keep  in  touch  with  the  business.  His  statistical  department  listed 
these  reports  and  found  that  they  numbered  exactly  one  hundred 
and  ten,  even  after  eliminating  several  as  valueless. 

The  company's  statistician  doubted  if  the  executive  could  find 
time  to  go  over  all  these  reports.  So  he  set  about  figuring  out 
how  they  could  be  condensed.  When  his  experiments  were 
finished  he  had  the  one  hundred  and  ten  reports  combined  into 
twelve  graphs  or  charts.  These  graphs  gave  a  complete  survey  of 
the  information  in  the  records — and  gave  it  in  one-tenth  of  the 
time. 

This  experience  illustrates  the  practical  usefulness  to  which 
graphs  can  be  put  in  almost  any  type  of  business.  In  almost 
every  case  where  comparisons  are  desired,  they  bring  out  the 
important  points  more  vividly  than  mere  figures  can.  They  keep 
facts  from  losing  themselves.  Also,  by  showing  tendencies  at  a 
glance,  they  save  the  time  of  wise  executives  who  desire  to  make 
use  of  past  performances  when  planning  for  the  future. 

The  success  which  the  sales  manager  of  a  small  company  in  the 
West  has  had  with  a  graphic  chart  corresponds  with  the  advan- 
tages obtained  by  the  statistician  who  was  anxious  to  aid  the 
general  manager  of  the  roofing  company.  He  uses  his  graphs  to 
keep  track  of  the  results  obtained  by  his  salesmen.  The  cost  of 
keeping  the  graphic  records  is  moderate.  The  information  they 
supply  is  valuable  for  comparative  purposes.  This  method  is 
suggestive  and  probably  could  be  used  profitably  by  many  other 
managers  desiring  a  comparative  record  of  the  effectiveness  of 
their  men. 

As  part  of  his  office  equipment  this  sales  manager  uses  a  flat- 
topped  desk  six  feet  long,  the  top  being  entirely  covered  by  a  piece 
of  plate  glass.    The  comparative  chart  is  kept  under  this  glass. 

The  chart  is  drawn  on  millimeter  paper.  A  six-foot  length  of 
this  paper  takes  care  of  the  records  of  twenty-seven  salesmen. 
The  chart  is  arranged  for  a  monthly  record.  If  so  desired,  the 
comparisons  could  be  made  weekly,  or  for  any  other  period  —  the 
only  consideration  is  that  the  longer  the  period,  the  longer  must 
be  the  paper,  in  order  to  display  the  same  number  of  comparisons. 


266  BUSINESS  STATISTICS 

In  the  column  headed  "  number,"  a  scale  is  printed  which 
starts  at  zero  and  works  upwards,  by  even  steps,  to  somewhat 
more  than  the  maximum  number  of  calls  possible  per  day. 

In  the  column  headed  "  dollars,"  a  scale  starts  at  zero  and 
works  upwards  to  a  point  about  50  per  cent  higher  than  the 
average  sales  per  man  per  month. 

In  the  column  at  the  foot  of  the  page  marked  "  average  cost," 
a  scale  starts  at  zero  and  works  up  to  a  point  higher  than  the 
maximum  cost  per  call. 

The  figures  in  these  scale  columns  depend,  of  course,  upon  the 
nature  and  quantity  of  business  obtained,  and  are  not  shown  here 
because  they  would  not  apply  in  other  businesses  in  precisely  the 
same  way,  although  it  is  easy  enough  to  fit  them  to  any  business. 

The  framework  of  the  chart  is  drawn  once  each  year.  It  shows 
graphically  seven  facts  about  every  salesman.  In  the  upper 
portion,  the  following  facts  appear: 

1.  Number  of  orders  obtained:  black  line; 

2.  Value  of  orders  obtained:  black  dotted  line; 

3.  Number  of  calls  made:  green  line; 

4.  Average  value  per  order:  green  dotted  line. 

On  the  lower  portion  of  the  chart,  these  facts  are  shown: 

1.  Average  cost  per  order  (salary,  commission  and  expenses):  black  line; 

2.  Averagecost  per  call:  black  dotted  line; 

3.  Average  cost  per  $100  of  orders:  green  line. 

These  seven  points  are  plotted  and  drawn  on  the  one  chart  to 
show  the  records  of  twenty-seven  salesmen  in  less  than  four  hours 
a  month. 

To  secure  the  information  which  goes  on  the  chart,  each  sales- 
man is  provided  with  a  supply  of  post  cards.  He  fills  out  one  of 
these  every  day  and  mails  it  to  the  office.  On  it,  in  the  convenient 
spaces  it  provides,  he  shows  the  number  of  calls  he  made  during 
the  day,  the  number  of  orders  he  obtained  and  the  value  of  these 
orders. 

When  the  cards  are  received  at  the  office,  the  information  each 
carries  is  transferred  to  the  salesman's  individual  summary  and 
at  the  end  of  each  month  the  figures  on  this  form  are  totaled  and 
the  averages  figured. 


SALES  AND  ADVERTISING  STATISTICS  267 

The  whole  routine  in  connection  with  keeping  this  chart  does 
not  represent  more  than  two  days'  work  per  month  for  a  clerk. 
So  it  is  obvious  that  a  similar  plan  can  be  installed  and  operated 
at  a  correspondingly  low  cost  by  any  manager. 

XIII.  Advertising  and  Sales  Department  Records  ^ 
By  Edward  S.  Babcox 

In  these  days  of  strenuous  competition,  the  sales  manager  is 
becoming  more  and  more  a  general;  he  is  armed  with  facts  and 
figures  about  his  territories,  knows  the  possibilities,  and  requires 
his  sales  agents  and  salesmen  to  produce  quota,  or  show  why. 

The  determination  of  a  fair  quota  for  each  territory  is  the  basis 
of  record  keeping  in  a  certain  large  concern  selling  a  well-known 
device  for  office  use.    Note  how  scientifically  they  do  it. 

First  they  determine  from  census  and  other  Government 
reports  that  there  are  so  many  concerns  in  each  of  seventy-five 
lines  of  business  in  the  United  States.  Then  they  ascertain  how 
many  there  are  in  each  line  in  each  territory. 

Secondly,  from  their  records  they  determine  how  many  ma- 
chines they  have  sold  to  date  to  each  line  of  business.  They 
figure  this  way;  if  there  are  5,000  banks  in  the  country  and  they 
have  sold  2,000  of  them,  that  is  40  per  cent.  Therefore  it  is  fair 
to  expect  that  every  sales  agent  shall  sell  40  per  cent  of  the  banks 
in  his  territory  this  year. 

Every  sale  is  reported  to  the  home  office,  and  is  tabulated  so 
that  the  facts  about  lines  of  business  are  available.  Then,  if 
a  representative  comes  to  the  home  office  and  objects  to  his 
quota,  the  fundamental  facts  and  figures  are  shown  him,  and  fre- 
quently he  sees  that  he  has  been  missing  many  good  bets  in  his 
territory  by  overlooking  certain  lines  of  business. 

His  quota  analyzed  by  lines  of  business  wakes  him  up  to  the 
possibilities  of  his  territory,  and  he  determines  that  he  can  do 
what  the  other  men  are  doing,  and  usually  does. 

Go  into  the  office  of  the  general  sales  manager  of  that  company 
and  you  will  find  one  desk,  one  table,  one  hat  tree,  and  six  or  eight 

*  Printers^  Ink,  August  29,  1912,  pp.  12-17;  September  5,  1912,  pp.  51-58. 
Reprinted  by  permission  of  Printers'  Ink.    Illustrations  of  forms  are  omitted. 


268  BUSINESS  STATISTICS 

chairs.  Desk  and  table  are  always  clear  of  papers;  no  trays  of 
held-over  work  being  visible. 

His  assistants  and  clerks  do  the  detail  work. 

A  certain  concern  manufacturing  a  product  which  is  more  or 
less  complex  and  which  must  be  sold  in  the  customer's  office  by 
the  manufacturer's  salesman,  rather  than  in  the  display  room, 
requires  its  branch  salesmen  to  keep  accurate  records  of  prospects 
and  customers.  Each  branch  city  is  divided  into  territories  and 
a  man  assigned  to  each.  The  home  office  furnishes  for  each  terri- 
tory a  list  of  all  possible  buyers,  arranged  alphabetically,  each  on 
a  5  X  3  card. 

Each  representative  calls  on  his  list  systematically  and  reports 
in  person  daily  to  his  manager  (who  has  previously  received  his 
written  reports) .  Thus  he  gets  pointers  about  his  territory  from  a 
more  seasoned  man.  He  has  a  card  for  each  customer,  and  one  of 
different  color  for  each  prospect.  Usually  he  indexes  these  by 
street  and  building,  so  when  he  calls  in  a  certain  section  he  can  take 
all  his  active  cards  for  that  vicinity  and  make  every  call  count. 

Each  of  these  cards  has  a  little  projecting  tab.  The  tabs  range 
across  the  top  in  seventeen  different  positions  and  are  numbered, 
one  number  to  a  tab.  Each  number  represents  a  different  busi- 
ness: (i)  architects;  (2)  wholesalers;  (3)  retailers,  etc.  These 
business  classifications  enable  the  salesman  effectually  to  cir- 
cularize his  list  with  appropriate  advertising  matter  and  conserve 
his  ammunition,  none  being  wasted. 

If  the  advertising  department  gets  out  a  folder  for  architects, 
there  is  no  need  of  circularizing  manufacturers,  retailers,  rail- 
roads, and  others  with  it  for  those  cards  carrying  architects'  tabs 
can  be  easily  picked  out. 

This  particular  system  for  branch  salesmen  is  actually  increas- 
ing sales  in  the  business  where  used. 

Travelers^  Record  System 

The  traveling  representatives  of  this  same  firm  have  definite 
territories,  ranging  from  one  state  to  four  or  five  in  sparsely 
settled  sections.  They  visit  each  town  on  an  average  of  four 
times  a  year.    Between  times  certain  prospects  will  need  atten- 


SALES  AND  ADVERTISING  STATISTICS  269 

tion,  so  the  sales  manager  has  each  man  carry  a  supply  of  cards. 
Regular  customers  are  entered,  one  on  a  card,  and  at  each  city 
the  traveler  receives  cards  for  that  town.  The  matter  at  the 
top  of  the  card  is  usually  filled  in  at  the  home  office,  and  the 
salesman  secures  the  balance  of  the  information  and  fills  it  in 
after  calling.  Of  course  he  makes  out  a  new  card  for  each  new 
prospect,  and  if  he  so  directs,  the  correspondence  department 
follows  up  any  prospects  he  reports.  Frequently  sales  are  closed 
between  his  calls.  If  this  is  done,  the  sale  is  entered  on  the  reverse 
side  of  the  card,  and  is  returned  to  the  traveler  next  trip.  Each 
card  is  good  for  four  calls,  and  usually  lasts  a  year.  Notice  that 
the  reverse  side  of  the  card  has  space  for  information  valuable 
to  the  traveler.  Receiving  the  same  card  on  four  successive  trips, 
and  after  that  a  new  one  with  the  old  one  attached,  he  has  his 
own  record  to  go  by  and  thus  refreshes  his  memory  about  a  cer- 
tain concern  before  calling. 

This  system  is  the  result  of  years  of  experience,  and  the  one 
card  gives  the  salesman  exactly  the  selling  information  he  needs. 

The  Sales  Manager  —  an  Executive 

The  sales  manager  wants  facts  and  figures  —  not  guesses  and 
surmises.  His  records  are  really  the  finished  photographs  which 
show  the  progress  of  the  concern.  Into  his  records  are  incor- 
porated the  reports  from  branches,  agents,  travelers.  With 
the  reports  he  gets  from  the  financial  man  —  profits,  costs  — 
these  enable  him  to  chart  daily  the  course  of  his  business  ship. 
They  are  truly  his  compass.  Sales  managers  in  different  Hnes  of 
business  require  different  kinds  of  records;  the  following  are 
suggestive  and  may  be  helpful. 

A  card  kept  by  one  sales  manager  shows  the  amount  of  busi- 
ness done  by  a  branch  or  agent  over  a  period  of  ten  years,  and 
is  of  untold  value  to  the  executive  who  designed  and  uses  it. 
Comparisons  may  be  made  instantly  with  all  the  figures  before 
him  in  this  way.  This  little  card  is  really  a  compact  encyclo- 
paedia of  sales  facts. 

The  same  sales  manager  uses  a  form  to  show  results  of  corre- 
spondence department  work.    One  card  is  made  out  for  each 


270  BUSINESS  STATISTICS 

correspondent,  and  the  detail  information  is  filled  in  from  month 
to  month  so  that  the  sales  manager  can  trace  increases  and 
decreases  accurately  and  effectively. 

Such  a  card  is  valuable,  too,  when  salary-raising  time  comes 
around.  It  shows  whether  a  man  is  earning  his  monthly  stipend, 
or  not. 

An  untold  number  of  records  might  be  illustrated  and  described 
here.  This  is  neither  wise  nor  necessary.  Other  valuable  records 
which  many  sales  managers  require,  however,  are: 

1.  Employees  record.  A  suitable  5x3  or  6x4  card  for  each 
employee  in  the  sales  end  of  the  business,  showing  date  of  original 
employment,  transfers  and  general  history. 

2.  One  card  for  each  item  in  the  line,  showing  sales  by  months 
for  that  item. 

3 .  Card  for  each  item  manufactured,  with  prices  of  correspond- 
ing item  sold  by  competitors. 

4.  Card  for  each  branch  office,  showing  sales,  expenses,  gross 
and  net  profits,  etc. 

These  and  many  other  similar  records,  which  every  down-to- 
date  sales  manager  has  in  some  form  in  his  office,  constitute  a 
sort  of  business  barometer  which  he  watches  as  a  physician 
watches  the  fever  chart  of  his  patient. 

Advertising  and  sales  departments  are  so  closely  related  now- 
adays that  it  is  difficult  to  discuss  them  separately.  Where  there 
is  need  of  both  departments  in  a  business,  the  more  closely 
they  are  associated,  the  better.  The  ideal  condition  obtains 
when  the  same  man  is  sales  and  advertising  manager  with  able 
assistants  to  look  after  different  portions  of  work  under  his  direct 
supervision. 

Facts  and  figures  are  at  a  premium  in  most  advertising  depart- 
ments; because  advertising  is  more  or  less  intangible;  because 
it  is  not  a  definite  science  where  the  dollar  expended  can  be 
counted  upon  to  produce  a  definite  return;  because  many  adver- 
tising managers  think  that  no  adequate  records  can  be  kept,  and 
therefore  do  not  keep  any. 

As  a  matter  of  fact,  they  beg  the  question,  —  the  need  for 
accurate  records  really  varies  inversely  as  the  amount  of  facts 


SALES  AND  ADVERTISING  STATISTICS  27 1 

at  hand.  The  fewer  the  facts  the  greater  the  need  of  a  record  of 
them. 

The  easiest  way  to  get  a  bird's-eye  view  of  advertising  depart- 
ment systems  is  to  outline  a  definite  series  of  methods  now  in  use 
in  a  typical  department  with  which  the  writer  is  familiar. 

To  begin  with,  the  advertising  appropriation  is  three  and  one- 
half  per  cent  of  gross  sales. 

This  particular  advertising  manager  at  the  beginning  of  each 
year  divides  his  funds  under  six  heads,  as  follows:  — 

1.  Printed  Matter.  4.  Postage. 

2.  Publicity.  5.   Salaries. 

3.  Engraving.  6.  Miscellaneous. 

He  makes  out  a  sheet  with  these  headings  down  the  side,  and 
months  across  the  top.  His  assistant  keeps  a  monthly  record  of 
expenditures  under  each  heading,  so  that  the  advertising  manager 
knows  always  where  he  stands.  The  totals  are  easily  obtainable 
because  each  order  is  numbered,  and  when  the  bill  comes  in  its 
amount  is  listed  on  a  day-book  journal-sheet  which  has  column 
headings  for  each  of  the  six  subdivisions.  Totals  each  month  give 
the  expenditures.    So  much  for  the  financial  side. 

Record  of  Circtdarizing 

Whenever  it  is  decided  to  send  out  circular  matter,  a  5x3  card 
is  made  out.  Many  facts  are  incorporated  on  this  little  record 
card,  the  face  side  giving  all  details  about  matter  sent  out,  and 
the  reverse  side  giving  an  accurate  line  on  replies  and  sales 
which  result. 

At  the  end  of  the  month  the  figures  from  all  cards  filled  out 
during  that  month  are  taken  from  the  cards  and  entered  on  ledger 
cards,  one  of  which  is  kept  for  each  territory.  From  these 
records  it  is  simple  to  get  a  complete  summary  and  a  total  on 
the  amount  of  matter  sent  out  from  month  to  month  and  year 
to  year.  These  figures  are  later  incorporated  in  a  compre- 
hensive, sununarized  report  which  is  submitted  monthly  by  the 
advertising  manager  to  the  board  of  directors. 


272  BUSINESS  STATISTICS 

Record  of  Magazine  Advertising 

It  is  important  that  an  accurate,  definite  record  be  kept  of  con- 
tracts with  publications.  One  card  is  made  out  for  each  publi- 
cation, and  where  a  large  list  is  used  the  cards  can  be  filed  either 
alphabetically  by  name  of  publication,  or  by  name  of  city. 

One  form  gives  a  definite  record  of  the  contract,  and  matter 
sent  to  the  publication,  another  gives  a  definite  record  of  sales. 
One  of  these  cards  is  made  out  for  each  publication  and  space  is 
provided  for  orders  received  on  each  day  of  the  year,  the  card 
being  printed  two  sides.  The  summaries  at  the  bottom  are  of 
unusual  value  to  the  advertising  manager  who  aims  to  keep  an 
accurate  line  on  his  work. 

Xrv.  The  Facts  that  Must  Govern  Advertising  ^ 

By  H.  Tipper 

Advertising  and  sales  are  so  intimately  connected,  being,  in  fact, 
only  different  phases  of  one  business  operation,  that  it  is  impos- 
sible for  the  advertising  manager  to  look  at  the  possibilities  of  a 
field  entirely  from  an  advertising  standpoint;  and  it  is  obvious 
that  in  considering  any  aggressive  selling  campaign,  either  with 
or  without  advertising,  the  following  points  necessarily  require 
illumination  in  order  to  determine  the  most  economical  method  of 
handling  the  business. 
The  points  are :  — 

The  capacity  of  the  plant  involved. 

The  consumption  of  the  article  in  question. 

The  number  of  competitors  in  the  field;  and,  consequently, 

The  total  amount  of  business  which  can  be  secured. 

The  present  consumption  in  relation  to  the  total  possible  consumption. 

The  increase  in  the  consumption  each  year  during  a  series  of  years  up  to 
the  present. 

The  consumption  in  the  different  states  or  zones  which  may  be  of 
interest  from  a  selling  standpoint,  showing  best  and  worst  from  the  total 
consumption. 

This  consumption  balanced  against  the  square  mileage  involved. 

^  Printers*  Ink,  December  28,  191 1,  pp.  10-12.  Reprinted  by  permission  of 
Printers'  Ink. 


SALES  AND  ADVERTISING  STATISTICS  273 

The  number  of  dealers  who  would  handle  this  article  —  if  it  is  to  be 
sold  through  dealers. 

Present  distribution  of  the  material  in  question. 

The  present  market  price  of  competitive  articles. 

The  total  amount  of  money  involved  in  business,  considering  the 
consumption. 

The  total  amount  of  money  involved,  considering  the  percentage  of  pres- 
ent consumption  which  could  reasonably  be  expected. 

The  total  profit  involved  in  this  amount  of  business;  and,  consequently, 

The  total  amount  of  advertising  and  selling  expense  which  could  be 
absorbed  in  developing  the  business. 

It  will  be  seen  from  this  array  of  the  factors  entering  into  the 
case  that  the  advertising  manager,  in  order  to  be  in  a  position  to 
decide  on  the  extent,  the  method  and  the  reason  for  advertising, 
must  be  familiar  with  the  conditions  from  all  selling  standpoints. 
Otherwise,  the  plan  of  advertising  decided  upon  may  have  only 
a  comparatively  small  relation  to  the  sales  effort  and  conditions. 

It  has  been  unusual,  even  in  the  selling  department  of  any  busi- 
ness, to  develop  all,  or  nearly  all,  the  factors  which  are  expressed 
above,  and,  as  a  natural  consequence,  a  large  amount  of  money 
is  being  expended  every  day  in  experimentation  upon  a  market 
regarding  which  the  facts  are  already  developed. 

The  usual  plan  in  by  far  the  majority  of  cases  where  it  is 
decided  to  market  a  new  product  is  to  start  a  few  salesmen  on 
what  would  appear,  from  a  personal  impression  or  general  knowl- 
edge of  the  trade,  to  be  the  most  important  markets  and  feel  the 
thing  out  in  this  way.  An  expenditure  of  $20,000  to  $50,000  is 
easily  absorbed  in  this  experimentation  without  developing  such 
information  as  would  form  the  basis  for  an  examination  into  the 
possible  efficiency  of  selling  and  the  possible  profit  to  be  secured. 

Personal  impressions,  even  those  of  one  or  two  men  who  have 
been  brought  up  in  the  industry,  are  easily  misled,  by  appearances 
and  local  conditions  through  restricted  fields,  into  an  entirely 
wrong  conception  of  the  market  and  the  methods  to  be  adopted 
in  covering  that  market  most  efficiently.  In  working  out  a  case 
a  few  years  ago,  the  writer  was  particularly  struck  with  this 
condition. 

The  plant  in  question  had  a  capacity  which  was  considered  by 
the  experienced  sales  manager  to  be  quite  small.    It  was  also  con- 


274  BUSINESS  STATISTICS 

eluded  by  this  gentleman  that  $15,000  or  $20,000  could  be  spent 
for  advertising  this  particular  output  in  addition  to  the  organiza- 
tion of  a  considerable  sales  force. 

Knowing  very  little  of  the  trade  conditions  in  this  field  and 
being  impressed  with  the  lack  of  statistics  on  the  subject,  the 
writer  made  an  investigation  which  was  carefully  carried  out  into 
the  possible  market  along  the  lines  in  which  it  was  proposed  to 
sell  the  article  in  question. 

This  investigation  showed :  (a)  that  the  personal  impression  or 
judgment  of  the  sales  department  was  utterly  at  fault  and  that  the 
writer's  judgment  was  equally  out  of  line  with  the  facts;  (b)  that 
the  total  consumption  of  the  article  in  question  in  the  field  pro- 
posed did  not  absorb  more  than  one-fourth  or  one-fifth  of  the 
capacity  of  the  plant,  and  anywhere  from  one-eighth  to  one- 
tenth  of  the  amount  expected;  (c)  that  the  cost  of  the  advertising 
and  sales  organization  proposed  would  have  been  entirely  out  of 
line  from  the  standpoint  of  possible  consumption  within  the  near 
future. 

While  this  was  an  unusual  case,  on  account  of  circumstances  in 
the  industry  involved,  which  made  the  apparent  importance  of 
the  business  much  greater  than  there  was  any  warrant  for,  it 
showed  conclusively  the  necessity  for  investigation  of  the  trade 
conditions  in  order  to  form  a  reasonable  basis  for  the  formation 
of  a  selling  plan;  and  inasmuch  as  advertising  is  a  part  of  the 
selling  plan,  the  same  necessity  arose  in  the  determination  of  the 
extent,  method  and  conditions  of  the  advertising. 

Apart  from  such  an  unusual  condition  as  this,  the  exces- 
sive cost  of  selling,  due  to  promotion  and  sales  work,  covering 
fields  and  methods  which  the  consumption  of  the  articles  would 
not  warrant,  has  just  as  much  to  do  with  the  difficulties  in 
many  organizations  as  the  over-capitalization  of  physical  prop- 
erties. 

I  have  in  mind  a  plant  in  the  Middle  West  where,  although  the 
business  had  increased  to  the  extent  of  requiring  double  the 
capacity  to  fill  it,  the  waste  of  efficiency  in  selling  and  the  conse- 
quent enormous  promotion  expense  made  it  impossible  for  this 
firm  to  realize  sufficient  profit  to  pay  a  dividend. 


SALES  AND  ADVERTISING  STATISTICS  275 

It  is  well  known  that  usually  the  expense  of  marketing  equals 
100  per  cent  of  all  the  other  factors  entering  into  the  cost  of  an 
article,  and  in  quite  a  number  of  cases  the  proportion  is  even 
greater. 

This  being  so,  it  is  evident  that,  in  order  to  approach  the  ques- 
tion of  marketing  any  particular  material,  it  is  necessary  that  the 
basic  information  should  be  at  hand.  This  should  be  arranged  in 
such  shape  that  an  intelligent  investigation  can  be  made  with  a 
view  to  approaching  the  marketing  of  the  product  with  a  high 
degree  of  efficiency. 

It  may  be  contended  that  the  advertising  manager,  dealing 
with  only  a  portion  of  the  selling  question,  is  not  interested  in 
the  development  of  a  number  of  these  factors.  It  is  true  that  the 
development  of  most  of  the  factors  should  naturally  fall  upon  the 
head  of  the  sales  department;  but  it  is  just  as  true  that,  as  a  rule, 
the  advertising  manager  is  in  the  best  position  to  make  such 
investigations  and  secure  the  information  along  these  lines. 
Except  in  the  notably  efficient  selling  organizations  which  stand 
out  as  unusual  monuments  of  efficiency,  the  sales  manager  has 
been  a  successful  salesman  with  a  turn  for  executive  management. 
For  a  number  of  years  selling  has  been  to  him  a  succession  of 
individual  deals  and  the  general  marketing  has  been  the  result 
of  these. 

As  a  matter  of  fact,  precisely  the  reverse  should  be  the  case  if 
the  subject  is  properly  approached.  The  individual  deal  and  the 
success  of  this  deal  is  the  result  of  an  intelligent  marketing 
scheme. 

Furthermore,  the  sales  manager  has  been  commonly  limited  in 
his  viewpoint  by  the  necessity  for  showing  a  certain  amoimt  of 
sales  within  a  specified  period  (say  six  months  or  one  year)  at  a 
certain  percentage  cost  of  selling.  This  has  the  effect  of  prevent- 
ing him  —  imless  he  is  unusually  far  sighted  —  from  viewing  the 
marketing  scheme  over  a  series  of  years  and  having  in  view  rather 
the  ultimate  effect  than  the  balance  in  his  favor  over  a  short 
current  period.  Too  much  advertising  has  been  done  without 
previous  investigation  of  trade  conditions  and  requirements,  and 
too  much  money  has  been  wasted  on  that  account. 


276  BUSINESS  STATISTICS 

XV.  Finding  the  Weak  Spots  in  General  Publicity  ^ 

By  Floyd  Y.  Keeler 

Any  manufacturer  of  an  article  of  common  utility  which  has 
attained  practically  perfect  national  distribution  is  continually 
confronted  with  the  problem  of  purely  local  conditions,  operat- 
ing sometimes  without  evident  rhyme  or  reason,  either  in  favor 
of  or  opposed  to  the  current  of  sales. 

For  instance,  a  city  like  Cleveland  may  be  a  good  town,  and 
the  whole  state  of  Ohio  may  be  going  well,  but  somehow,  next 
door,  in  Indiana,  sales  may  never  have  been  quite  as  large  as  they 
ought  to  have  been.  Or  again,  sales  may  be  gaining  volume  in 
Massachusetts,  while  in  Boston  itself  they  seem  to  be  going  back. 

To  paraphrase  a  well-known  saying:  You  can  hold  some  locali- 
ties all  of  the  time;  you  can  hold  all  localities  some  of  the  time; 
but  you  can't  hold  all  the  locaHties  all  of  the  time.  No  matter 
how  meritorious  and  even  superior  the  article  may  be,  there  will 
be  places  where  sentiment  will  slump  from  the  highest  popular 
approval  and  patronage  to  the  blankest  indifference,  or  even  to 
actual,  if  undeserved,  ill  repute.  And,  conversely,  the  other  way 
around. 

The  causes  of  these  fluctuations  comprise  an  infinite  but  highly 
entertaining  variety.  The  unscrupulous  competitor  who  taints  a 
whole  district  with  insidious  libels;  outbreaks  of  price  wars  where 
dealers  seize  on  justly  popular  advertised  specialties,  cutting  the 
whole  local  market  from  under  them;  the  legitimate  boom  which 
often  develops  for  a  similar  (just  as  good)  article  of  local  manufac- 
ture to  make  it  the  local  fashion;  such  specific  causes  could  be 
catalogued  page  upon  page.  Then  there  is  the  natural  ebb  and 
flow  which  always  characterizes  demand,  due  to  more  subtle  and 
not  so  easily  get-at-able  causes.  And  there  are  also  the  utterly 
unresponsive  territories  where  the  backward  local  conditions  are 
fundamentally  unfavorable  to  creation  of  demand. 

There  are  undoubtedly  many  lines  in  which  it  is  a  highly  suc- 
cessful and  constructive  policy  to  let  advertising  immediately 

^Printers'  Ink,  May  i,  1913,  pp.  17-22.  Reprinted  by  permission  of  Printers' 
Ink. 


SALES  AND  ADVERTISING  STATISTICS  277 

flow  into  areas  of  sales  depression,  in  order  to  reclaim  them  to  a 
point  of  maximum  volume.  But  there  are  perhaps  a  far  greater 
proportion  of  enterprises  where  it  pays  better  to  ride  with  the 
strongly  favoring  tides,  leaving  the  unprofitable  sections  to  reach 
a  normal  balance,  supported  by  enough  national  advertising  to 
keep  them  moderately  active,  and  when  the  unprofitable  period 
has  passed  be  sufficient  to  increase  sales  materially;  or  until  the 
unprofitable  section  in  question  shall  be  reached  through  the 
medium  of  a  small  surplus  appropriation  available  for  use  locally. 

Given  such  conditions,  it  was  entirely  possible  to  advertise 
largely  where,  for  some  local  reason,  it  did  not  pay,  and  on  the 
other  hand,  a  very  small  proportionate  expenditure  might  be 
made  where  all  the  conditions  were  entirely  favorable  for  a  large 
immediate  increase  in  sales.  It  is  manifestly  bad  judgment,  even 
to  the  point  of  being  fooKsh,  to  spend  $1,000  in  advertising  in  a 
community  where  the  total  sales  were  only  $1,500,  and  equally 
absurd  to  spend  only  $50  in  the  same  community. 

About  two  years  ago  the  writer  decided  to  make  a  definite 
analysis  of  the  facts  and  figures  at  hand  to  ascertain  the  amount 
spent  in  each  town  to  sell  a  dollar's  worth  of  goods. 

Or,  to  state  it  differently,  the  percentage  of  the  sales  in  each 
community  represented  by  the  money  spent  for  advertising  in 
newspapers  reaching  that  commimity. 

Finding  the  Net  Cost  of  the  Advertising 

In  order  to  arrive  at  that  conclusion,  it  was  first  necessary  to 
secure  the  following  information:  — 

1.  In  what  towns  are  sales  made  ?  What  sort  of  towns  are 
they:  manufacturing  centers,  mercantile,  farming,  railroad,  etc.  ? 
What  is  the  population  ?    Who  are  the  dealers  ? 

2.  The  sales  to  each  dealer  for  five  years  back.  The  sales  for 
the  current  year  as  compared  with  the  average  sales  for  five 
years.  . 

3.  Newspapers  used  in  each  town.  Combined  circulation  of 
papers.    Net  cost  of  advertising  in  the  town.  • 

The  net  cost  of  advertising  divided  by  the  net  sales  will  give 
the  per  cent  of  advertising  cost  for  the  locality  —  the  number  of 


278 


BUSINESS  STATISTICS 


cents  the  company  spent  there  during  the  current  year  to  sell  a 
dollars'  worth  of  tooth  powder.  The  five-year  sales  figures  will 
show  whether  the  market  is  improving  or  the  reverse,  and 
will  indicate  any  abnormal  conditions  which  may  need  to  be 
investigated  separately. 

Tabulation  Showing  Advertising  Cost  per  Dollar  of  Sales 


ANY   STATE 
Population  1,500,000 

Town 

Class 

Popu- 
lation 

No. 

gross 

1907-12 

yr.gr. 

Average 

no. 

gross 

1907-12 

No. 
gross 
1911 

Papers 

Circu- 
lation 

Net 
cost 
adv. 
1911 

Net 
sales 
1911 

Per 
cent 

Waynesville 

Capital  Drug  Co. . 

Davis  and  Co 

Norwood 

SchaefferandCo.. 

Norwood  Dr.  Co. . 

Redington 

Hover  and  Co 

Mfg. 

Mfg. 
R.R.T. 

23.975 

45.941 
29.536 

'07  10 
'08     5 
'09  .. 
'10     5 
'11     5 

'08  10 
'09     S 
'10  10 
'11     5 

'10  IS 
'11     5 

'07   25 
'08  20 
'09   25 
'10  15 
'11   10 

'07   10 
'08     5 
'09  10 
'10     5 
'11     5 

II 

23 
7 

10 

IS 

5 

Times 
Record 

Gazette 

6,966 

17,965 

$46.69 

95.88 

$205.20 

307.80 
102.60 

.227 
.246 

99,452 

41 

30 

24,931 

$122.57 

$615.60 

.199 

Much  of  this  information  was  compiled  from  jobbers'  records. 
It  was  no  small  task,  but  it  was  finally  collated  and  tabulated  on 
sheets,  showing  the  entire  country  by  states  and  towns.  The 
result  showed  the  percentage  of  advertising  cost  for  each  town, 
and  for  each  state  by  totaling  the  columns.  The  accuracy  of  the 
whole  was  tested  by  adding  the  state  totals  into  a  grand  total 


SALES  AND  ADVERTISING  STATISTICS  279 

and  comparing  with  the  ledger  records  of  total  sales  and  total 
advertising  expenditures. 

The  accompanying  chart  is  a  section  of  a  page  from  the  record, 
with  fictitious  names.  In  the  first  column  is  the  name  of  the  town, 
with  dealers'  names  directly  underneath.  The  classification  of  the 
town  follows,  with  its  population.  In  the  next  column  follows 
the  number  of  gross  bought  by  each  dealer,  year  by  year,  for  five 
years.  Then  comes  the  average  number  of  gross  for  five  years 
bought  by  all  dealers  in  the  town,  and  the  total  amount  for  the 
current  year.  The  four  columns  following  need  no  explanation, 
and  the  last  gives  the  advertising  cost  per  dollar  of  sales  in  each 
town. 

Summarized  briefly,  the  chart  shows  that  in  "  Waynes ville," 
a  town  of  25,000,  sales  of  $205.20  were  made  at  an  advertising 
expense  of  22  per  cent.  In  "  Norwood,"  a  town  of  45,000,  it  cost 
24  per  cent  in  advertising  to  sell  $307.80  worth,  and  in  "Reding- 
ton,"  a  town  of  29,000,  $102.60  worth  was  sold  without  any  direct 
expenditure  in  the  town.  The  totals  show  $615.60  in  sales  for 
three  towns,  at  an  advertising  expenditure  of  approximately 
20  per  cent. 

Of  course,  the  appropriation  —  a  specific  and  non-elastic  per- 
centage of  the  last  year's  gross  sales  —  was  an  indication  of  the 
amount  that  was  available  for  the  getting  of  new  business,  but 
this  represented  a  lump  sum  and  still  remained  to  be  appor- 
tioned all  over  the  United  States.  With  the  recently  obtained 
advertising  analysis  available,  it  was  possible  to  figure  with  some 
degree  of  certainty  the  exact  amount  of  money  necessary  to  cover 
the  entire  country  thoroughly  by  the  use  of  newspapers  — 
strengthening  those  points,  like  "  Redington "  in  the  chart 
reproduced,  where  no  direct  advertising  was  done,  and  cutting 
down  the  expenditure  in  those  states  and  cities  where  the  per- 
centage was  manifestly  too  high.  It  was  found  that  to  cover 
the  United  States  adequately,  a  large  increase  in  the  number 
of  newspapers  must  be  made  —  a  thousand  at  the  very  least. 
This  would  have  meant  a  trebling  of  the  appropriation,  or 
cutting  the  size  of  the  space  to  a  point  where  it  would  be  almost 
negligible. 


28o 


BUSINESS  STATISTICS 


The  logical  thing  to  do,  therefore,  was  to  select  a  list  of  maga- 
zines for  use  during  191 2,  so  that,  having  used  newspapers  alone 
and  magazines  alone,  the  strong  and  weak  places  in  both  plans 
could  be  compared,  with  the  idea  of  supplementing  one  medium 
with  the  other  wherever  it  was  possible  to  do  so  successfully. 

At  the  end  of  191 2  a  chart  like  the  second  one  reproduced  was 
made  out,  showing  the  percentage  of  advertising  cost  per  dollar  of 
sales,  just  as  was  done  in  191 1 .    This  last  chart,  of  course,  covered 

AppoRTiONmG  Magazine  Circulation  According  to  Sales 

ANY  STATE 
Population  2,100,000 


Sales  aver. 

Cash 
sales 
1912 

City  cir- 
culation, 
magazines 

City  ad- 
vertising 
cost,  mag- 
azines 

City 
per 
cent 

Rural  cit, 
magazines 

Rural 
adv.  cost, 
magazines 

Town 

syrs. 

1912 

Littleton 

Sali.sbury 

Rockland.... 
Freeport 

40 

38 

50 

5 

60 
60 
65 
15 

$1,231.20 

1,231.20 

1,333.80 

307.80 

16,131 

7,400 
4,754 
1,258 

$126.79 

58.16 

37.37 

g.89 

.103 
•047 
.028 
•03 

79,832 

$627.48 

133 

200 

$4,104.00 

29,543 

$232.21 

79,832 

$627.48 

29,543 
79,832 

Total  state  circulation 

109,375 

Total  state  advertising  cost 

$859.69 

Divided  by  $4,104.00  cash  sales  equal  20.9  per  cent  total  state  advertising. 


the  same  territory  as  the  191 1  chart,  while  practically  the  same 
merchandising  conditions  obtained.  One  chart  shows  the  results 
of  newspapers  alone  and  the  other  those  of  the  magazines 
alone.  A  careful  comparison  of  the  two,  state  by  state,  city  by 
city,  shows  up  the  weak  spots  and  tells  at  a  glance  where  it  is 
necessary  to  supplement  general  (national)  magazine  circulation 
with  (local)  newspapers. 

It  will  also  be  noted  on  the  magazine  chart  that  there  is  a  dis- 
tinct ratio  existing  between  the  state  population  and  the  state 
circulation,  but  more  particularly  between  the  city  population 
and  the  city  circulation  in  the  newspaper  chart.    Therefore,  as 


SALES  AND  ADVERTISING  STATISTICS  28 1 

one  circulation  is  really  a  part  of  the  total  state  circulation,  the 
logical  thing  to  do  on  a  nationally  distributed  article  is  to  combine 
the  two  kinds  of  circulation  to  produce  a  maximum  result. 

The  whole  problem,  after  all,  is  to  eliminate  waste  circulation 
and  its  natural  corollary,  the  ill-advised  expenditure  of  the 
appropriation. 

The  final  results  obtained  should  be  the  spending  of  an  advertis- 
ing appropriation  a  good  deal  more  effectively  than  is  the  case 
in  the  ordinary  concern  with  national  distribution  where  the 
article  is  handled  by  jobber  and  dealer. 

XVI.  Using  Buyers  to  Find  Out  How  to  Reach 

Prospects  ^ 

By  Roscoe  C.  Chase 

Very  little  definite  information  regarding  the  exact  newspaper 
situation  in  our  larger  cities  is  in  the  possession  of  national 
advertisers.  In  fact,  there  are  very  few  advertising  agency  space 
buyers  who  understand  the  true  situation  in  many  of  the  larger 
cities. 

The  idea  of  investigating  the  true  circulation  condition  was 
suggested  to  me  recently  when  sending  out  orders  for  a  consider- 
able amount  of  daily  newspaper  advertising.  I  thought  to  myself : 
"  What  if  the  general  manager  should  come  to  me  and  ask  why  I 
am  spending  money  in  any  one  of  these  papers.  I  could  tell  him 
different  facts  regarding  a  number  of  them,  but  on  the  great 
majority  I  am  taking  the  word  of  some  one  else,  and  that  word 
may  be  merely  an  individual  opinion  based  on  fact  or  prejudice.'' 
From  that  minute  on  I  have  made  an  earnest  endeavor  to  inves- 
tigate every  publication  of  any  consequence  in  which  we  are 
advertising. 

Every  one  of  the  larger  cities  has  one  newspaper  which  is  always 
head  and  shoulders  above  all  others  for  reaching  the  great  middle 
class.  This  paper  is  usually  acknowledged  as  preeminent  by  the 
other  publishers,  and  most  of  them  make  strong  claims  for  second 
place. 

1  Printers^  Ink,  February  20,  1913,  pp.  70-72.  Reprinted  by  permission  of 
Printers^  Ink. 


282  BUSINESS  STATISTICS 

This  makes  it  very  difficult  to  come  to  a  definite  decision  with 
regard  to  the  standing  of  the  second,  third,  fourth,  etc.,  especially 
when  each  of  these  papers  is  employing  the  best  space-salesmen 
money  will  buy.  Ofttimes  the  weakest  has  the  highest-priced 
salesmen,  and  carries  considerably  more  advertising  than  some 
which  are  entitled  to  it  on  account  of  the  value  of  additional  cir- 
culation and  the  quality  thereof. 

In  some  cases  the  advertising  manager  knows  the  conditions, 
but  is  powerless  to  control  them,  owing  to  personal  favors  of  the 
salesmen.  I  have  often  heard  such  advertising  men  remark: 
"  That  man  ought  to  be  on  our  salary  list,  and  the  least  I  can  do 
is  to  give  his  paper  some  of  our  advertising  appropriation." 
Usually,  however,  such  a  salesman  works  in  over  the  head  of  the 
advertising  man,  and  it  is  not  in  his  power  to  refuse  to  use  his 
paper. 

With  all  this  in  mind  it  is  interesting  to  note  the  result  sheets 
of  our  recent  poll  among  Packard  owners  in  the  larger  cities,  with 
reference  to  the  newspapers  they  read  regularly.  Many  new 
suggestions  are  arrived  at  as  we  look  over  these  return  slips  and 
figure  out  the  various  angles  at  which  results  leading  toward 
definite  knowledge  of  the  exact  situation  from  our  viewpoint  are 
revealed. 

There  is  a  great  deal  more  information  to  be  gained  than  we  at 
first  anticipated,  and  it  seems  to  me  that  it  will  be  of  great  advan- 
tage to  all  nation-wide  advertisers  to  take  up  some  similar  method 
of  investigating  the  advertising  situation  in  so  far  as  it  applies  to 
their  own  product. 

Our  investigation  has  been  solely  from  the  viewpoint  of  selling 
a  high-priced  motor  car  of  exceedingly  good  quality,  and  while 
the  results  would  apply  to  the  manufacturer  selling  an  equally 
good  piano,  phonograph,  etc.,  the  figures  would  be  of  small  con- 
sequence to  one  selling  an  article  of  general  consumption  among 
the  masses.  Still  some  similar  plan  of  investigation  could  be 
worked  out  to  excellent  advantage  by  every  national  advertiser 
with  the  object  of  securing  the  best  results  for  money  expended. 

My  latest  investigation  has  been  among  the  daily  and  Sunday 
newspapers.    In  each  of  the  larger  cities  this  investigation  was 


SALES  AND  ADVERTISING  STATISTICS  283 

carried  on  in  such  a  way  as  to  get  the  most  out  of  it.  To  a  certain 
number  of  owners  in  each  city  I  sent  a  list  of  all  the  papers  pub- 
lished, and  when  the  paper  was  published  both  daily  and  Sunday 
I  made  two  entries,  and  when  it  was  morning,  evening  and  Sun- 
day, three  entries.  No  letter  was  enclosed  but  a  simple  request  of 
what  was  wanted  was  multigraphed  at  the  top  of  each  list,  with 
which  was  enclosed  a  return  stamped  envelope. 

In  a  large  Eastern  city,  reports  from  124  Packard  owners  show 
that  they  read  a  total  of  699  newspapers.  Dividing  this  into  daily 
and  Sunday  I  find  that  235  are  Sunday  papers  and  464  daily 
papers.  Dividing  the  dailies  there  are  241  in  the  morning  field 
and  223  in  the  evening. 

At  first  it  seemed  strange  to  me  that  the  three  fields  were  so 
evenly  balanced,  but  on  going  into  the  matter  deeper  I  finally  con- 
cluded that  it  was  not  such  a  hard  problem  as  I  had  originally 
imagined.  Each  of  the  124  Packard  owners  reads  an  average  of 
nearly  two  papers  in  the  morning,  two  papers  in  the  evening,  and 
two  on  Sunday. 

Owing  to  many  dealings  with  Packard  owners  I  have  discovered 
that  the  average  is  a  business  man  fairly  well  fixed  financially,  and 
sufficiently  able  mentally  to  value  the  very  best  article  in  any 
particular  line  regardless  of  the  price.  If  such  a  man  were  to  tie 
himself  down  to  the  opinion  of  one  great  editor  or  one  paper,  it  is 
only  natural  to  suppose  that  his  opinions  and  judgments  would  be 
sorely  hampered.  Instead  of  that  he  is  big  enough  to  realize  that 
he  must  see  the  best  two  papers,  morning,  evening  and  Sunday, 
that  his  opinion  may  be  properly  reasoned  out  considering  the 
situation  from  the  viewpoint  of  the  several  editorial  staffs. 

You  and  I  in  the  advertising  business  who  perhaps  read  a  great 
many  papers  are  surely  wise  enough  to  know  that  many  situa- 
tions are  explained  very  differently  in  different  papers.  Some 
publishers  refuse  to  publish  information  about  certain  transac- 
tions or  dealings,  whereas  others  play  them  up  strongly. 

In  a  certain  Western  city,  I  found  113  owners  reading  a  total 
of  514  papers.  While  each  man  in  the  Eastern  city  reads  an 
average  of  nearly  six  papers,  it  seems  that  the  average  in  this 
Western  city  had  dropped  down  to  considerably  less  than  five. 


284  BUSINESS  STATISTICS 

As  divided  between  morning  and  evening  papers,  the  report 
shows  the  following  result:  morning  188,  evening  149,  Sunday  177. 
The  majority  read  two  morning  and  two  Sunday  papers,  but  it  is 
only  about  every  other  one  or  less  who  reads  two  in  the  evening. 

By  using  two  morning  and  one  evening  in  the  Western  city  we 
can  reach  95  per  cent  of  the  owners  once,  and  about  80  per  cent 
twice,  and  50  per  cent  three  times. 

The  situation  in  a  second  Eastern  city  proves  somewhat  similar 
to  that  in  the  West,  excepting  that  the  distribution  of  papers  seem 
to  be  a  little  more  than  five  to  each  owner. 

In  one  city  where  it  has  been  our  desire  to  advertise  very 
extensively  and  thoroughly,  we  have  in  the  past  used  six  news- 
papers, including  daily  and  Sunday.  In  checking  over  each  of  the 
slips  sent  in  by  Packard  owners  from  that  community,  I  find  that 
by  using  two  evening  papers  and  one  morning  paper  I  can  reach 
97  per  cent  of  the  owners.  Eighty-five  per  cent  of  them  are 
reached  by  two  papers  and  about  60  per  cent  by  all  three. 

There  is  surely  a  remarkable  discovery  on  our  part,  and  no 
doubt  we  can  make  our  next  campaign  much  more  profitable  by 
sticking  to  these  three  papers  and  perhaps  increasing  the  space 
one-half.  This  will  prove  less  costly,  and  after  carefully  consider- 
ing all  other  features  we  believe  it  will  prove  a  much  better 
advertising  venture  on  our  part. 

It  is  our  intention  to  go  over  each  slip  sent  back  to  us  by 
Packard  owners,  and  consider  it  from  every  possible  angle  which 
may  be  of  advantage  to  us  in  the  selecting  of  the  papers  in  which 
we  advertise. 

The  average  individual  who  owns  and  operates  a  Packard  car 
or  who  is  in  the  position  of  one  we  would  term  a  good  prospect  is 
an  active  business  man  or  woman  having  mental  intelligence  and 
standing  above  the  average.  If  a  fairly  representative  number  of 
these  individuals  read  a  certain  paper  or  number  of  papers  each 
week,  daily  and  Sunday,  we  feel  confident  that  those  friends  and 
business  acquaintances  with  whom  they  are  daily  associated  must 
follow  a  somewhat  similar  routine. 

It  therefore  seems  reasonable  to  us  to  believe  that  if  we  are 
reaching  95  per  cent  of  all  Packard  owners  in  one  community  by  a 


SALES  AND  ADVERTISING  STATISTICS  285 

certain  combination  of  papers  that  we  can  reach  approximately 
the  same  general  percentage  of  prospective  owners  with  the  same 
combination. 

XVII.  How  Packard  Investigated  Quality  of 
Circulation  ^ 

By  Roscoe  C.  Chase 

Duplicated  circulation  among  newspaper  and  magazine  readers 
and  its  value  to  national  advertisers  is  the  subject  for  many  dis- 
cussions. To  determine  the  exact  amount  is  not  so  difficvdt  if  one 
takes  the  time  and  trouble  to  investigate  it. 

In  reading  the  facts  submitted  regarding  my  recent  circulation 
investigations,  keep  in  mind  that  to  advertise  Packard  motor  car- 
riages properly  it  is  necessary  that  we  reach  primarily  three  sets 
of  individuals.  First,  the  man  or  woman  who  has  the  wherewithal 
to  own  and  operate  such  a  car;  second,  those  who  comprise  their 
associates  and  friends,  being  associated  with  the  first  class  at 
social  functions,  clubs  and  in  business;  third,  those  who  act  as 
business  assistants,  associates  and  friends  of  the  second  class. 
Often  the  persons  comprising  the  third  class  are  in  direct  touch 
with  those  of  the  first,  although  they  stand  in  much  closer  rela- 
tionship with  the  second  class  than  they  do  with  the  first. 

If  it  were  necessary  to  reach  only  those  in  class  niunber  one, 
we  would  save  money  by  securing  their  names  and  addresses  and 
concentrating  our  solicitations  by  personal  salesmanship  and  by 
mail.  We  must  also  reach  classes  two  and  three,  as  much  of  the 
buying  is  done  on  the  recormnendation  and  approval  of  those 
who  desire  but  can't  afford  what  we  have  for  sale. 

In  compiling  results  from  our  inquiries  we  believe  the  percent- 
age of  each  class  reached  by  a  given  newspaper  is  about  equal  to 
the  other  two  classes.  That  is  if  we  are  reaching  95  per  cent  of  the 
Packard  owners  with  a  certain  combination  of  newspapers  it  is 
safe  to  believe  we  are  reaching  95  per  cent  of  their  friends  and 
associates  with  the  same  papers.    Class  three  read  largely  the 

1  Printers'  Ink,    July    10,    1913,.  pp.    17-20.      Reprinted  by  peraiission   of 

Printers'  Ink. 


286  BUSINESS  STATISTICS 

same  papers,  although  we  beKeve  from  observation  they  read 
other  papers  in  addition. 

It  has  proven  most  interesting  to  figure  out  the  best  grouping 
of  the  newspapers  to  accomplish  the  greatest  efficiency  for  the 
least  amount  of  money.  This  is  the  result  desired  by  every  large 
manufacturer  who  is  advertising  to  create  that  general  publicity 
effect  which  is  so  desirable. 

Each  of  the  lists  returned  has  been  gone  over  carefully,  figuring 
the  various  newspaper  combinations,  duplications,  etc.  The 
result  gives  us  not  only  the  relative  standing  of  the  newspapers, 
but  also  makes  it  possible  to  figure  out  just  how  many  times  we 
reach  a  given  reader  by  using  certain  newspapers. 

In  some  cases  we  accomplish  great  efficiency  by  using  one 
morning  paper  and  one  evening  paper.  In  others  we  must  use  a 
combination  of  three  papers  and  in  the  very  large  cities  a  com- 
bination of  four  or  five  papers  seems  advisable. 

As  an  illustration,  I  will  give  the  results  as  figured  recently  on 
494  replies  from  New  York  City.  Three  hundred  and  eighty  of 
these  replies  were  from  Packard  owners  and  114  from  members  of 
the  New  York  Stock  Exchange,  not  Packard  owners.  The  Stock 
Exchange  members  were  written  after  we  had  heard  from  Pack- 
ard owners.  Certain  newspapers  advised  us  that  we  had  not 
given  them  a  fair  chance,  as  we  had  never  advertised  in  their 
papers,  and  therefore  we  couldn't  expect  to  find  many  Packard 
owners  among  their  readers.  Regardless  of  this  the  result  of  the 
investigation  among  non-owners  proved  almost  identical  with 
the  exception  that  two  papers  received  a  little  increase,  prob- 
ably due  to  special  Stock  Exchange  news  which  they  publish 
daily. 

In  going  over  the  results  to  obtain  the  greatest  benefit  for  the 
least  money,  I  have  carefully  figured  all  the  various  combinations, 
including  two  papers,  three  papers,  and  four  papers.  As  a  result 
the  most  efficient  combination  seems  to  be  what  I  have  termed 
the  "  Big  Four.''  In  other  words,  I  can  take  two  morning  and 
two  evening  papers  and  by  advertising  in  all  four  reach  96  per 
cent  of  the  owners  and  prospects  in  New  York  City  and  suburbs, 
reaching  many  of  them  two,  three,  and  even  four  times. 


SALES  AND  ADVERTISING  STATISTICS 


287 


To  illustrate  this,  I  will  go  over  the  resultant  figures,  using 
numbers  instead  of  names  to  indicate  the  papers.  In  the  follow- 
ing table  No.  i  and  No.  2  represent  morning  papers  and  No.  3 
and  No.  4  evening  papers.  I  have  tabulated  the  results  on  the 
494  returns  and  the  figures  represent  the  number  of  people  who 
read  the  various  combinations.  I  might  add  that  one  of  the 
morning  papers  is  a  Sunday  issue,  for  I  find  that  the  Sunday 
issue  of  this  paper  is  read  by  more  people  of  the  class  we  desire  to 
reach  than  the  daily  issue,  while  in  the  case  of  the  other  morning 
paper  the  daily  edition  has  a  considerable  advantage  over  the 
Sunday. 


24  read 
four  papers 


No.  I 
No.  2 


No.  I 
No.  2 

No.  3 


No.  2 
No.  3 
No.  4 


43 


31 


17 


114  read 
three  papers 


No 
No 

No 
No 

No 

No 

No 

No 

No 
No 


35 


60 


No.  I — 65 
No.  2 — ^40 

No.  3—23 

No.  4 — 17 

18 


35 


22 


193  read 
two  papers 


145  read 

only  one  paper    " 

read  none  of  the  four 


494    Total 

You  will  notice  that  by  using  the  four  papers  we  reach  all  but 
18;  that  is,  we  reach  476  out  of  the  494,  or  an  efficiency  of  over 
96  per  cent.  Three  hundred  and  thirty-one  or  67  per  cent  are 
reached  two  times;  138  or  38  per  cent  three  times,  and  24  or  5 
per  cent  four  times.  Figuring  this  further,  we  find  that  we  place 
a  Packard  advertisement  before  the  494  people  969  times  or  an 
average  of  close  to  two  times  for  each  individual. 

Now,  most  any  combination  can  be  arranged  from  the  above 
table.   You  can  find  what  efficiency  is  obtained  by  any  one  paper, 


288  BUSINESS  STATISTICS 

what  efficiency  by  using  two  morning  or  two  evening  or  one 
morning  and  one  evening,  or  by  using  any  three.  If  you  take 
into  consideration  the  rate  per  line  for  the  advertising,  you  can 
discover  your  best  bargain  combination.  Some  argue  that  a  list 
of  494  is  not  enough  to  judge  from  and  to  know  definitely  would 
necessitate  a  reply  from  every  man  of  sufficient  financial  standing 
to  own  and  operate  a  Packard  car. 

To  decide  this  question  our  results  were  tabulated  in  sets  of 
1 26  and  each  of  these  sets  was  compared  with  the  other  two.  The 
comparison  is  close  in  so  far  as  each  paper  is  concerned  and  the 
Stock  Exchange  returns  check  up  very  closely  with  each  of 
the  three  sets  of  owners. 

Showing  of  Different  Combinations 

Now,  I  wanted  to  know  what  efficiency  would  be  obtained  by 
three  papers  and  so  I  took  paper  No.  i,  which  reached  more  of 
the  informants  than  any  of  the  others,  as  a  basis  and  figured  the 
several  combinations  it  makes  with  two  of  the  other  three. 
Taking  Nos.  i,  2  and  3,  I  find  that  we  reach  459  out  of  the  494 
or  93  per  cent.  We  reach  270  or  54  per  cent  two  times  and  67  or 
13K  per  cent  three  times.  Using  the  combination  of  Nos.  i,  2 
and  4,  we  reach  453  out  of  494,  or  approximately  93  per  cent 
once;  271  or  54  per  cent  two  times  and  55  or  11  per  cent  three 
times.  Now,  this  second  combination  costs  us  four  cents  per  line 
more  than  the  first  combination,  and  there  is  so  little  difference 
in  the  figures  that  it  would  seem  advisable  to  use  the  cheaper 
combination.  The  third  combination  made  would  use  papers 
Nos.  I,  3  and  4;  that  is,  one  morning  and  two  evening.  With 
this  combination  we  reach  436  or  88  per  cent;  237  or  48  per 
cent  are  reached  two  times  and  47  or  10  per  cent  are  reached 
three  times.  This  combination  is  considerably  cheaper  than 
either  of  the  other  two,  costing  ten  cents  per  line  less  than 
the  second  combination  and  fourteen  cents  per  line  less  than  the 
first. 

Opinions  differ  with  reference  to  the  value  of  evening  papers  as 
compared  with  morning  papers.    If  the  weight  of  opinion  seems 


SALES  AND  ADVERTISING  STATISTICS  289 

to  be  in  favor  of  the  evening  papers,  then  here  is  a  chance  to  use 
88  per  cent  efficiency  at  from  ten  to  fourteen  cents  per  line  less 
than  the  93  per  cent  efficiency. 

This  illustration  of  one  newspaper  situation  will  give  you 
just  a  fair  idea  of  how  interesting  it  is  to  carry  a  newspaper 
investigation  to  such  length  as  really  to  feel  that  you  know  you 
are  getting  the  best  distribution  at  the  lowest  cost.  At  almost 
every  turn  in  your  calculations  you  are  confronted  with  new  and 
surprising  facts.  You  can  branch  off  from  an  investigation  of 
this  kind  at  most  any  place  and  find  many  new  ideas  for  con- 
sideration. In  almost  every  locality  the  circumstances  and 
conditions  are  so  different  as  to  add  new  interest. 

As  an  example  of  such  circumstances,  compare  the  newspaper 
situation  in  New  York  with  that  in  Boston.  In  New  York  the 
figures  show  that  the  average  man  who  is  financially  able  to  own 
and  operate  a  high-priced  car  reads  regularly  an  average  of  almost 
two  morning,  two  evening  and  two  Sunday  newspapers. 

In  Boston  our  tally  sheets  show  that  while  they  read  two  morn- 
ing and  two  evening  newspapers,  there  is  an  average  of  less  than 
one  Sunday  newspaper  to  a  Packard  owner's  household.  That  is 
the  only  circumstance  of  this  kind  which  has  so  far  confronted  me 
in  the  investigations  in  the  many  cities  where  we  have  taken  the 
trouble  to  find  out  the  exact  situation.  In  the  smaller  cities  we 
can  cover  the  field  quite  thoroughly  with  two  papers,  reaching 
a  majority  of  the  owners  with  both  papers.  In  some  cities 
it  is  necessary  to  use  three  or  four  papers,  as  the  circulation 
seems  to  be  very  much  divided  with  a  smaller  percentage  of 
duplication. 

In  Chicago,  for  instance,  if  we  were  to  cover  the  evening  field  it 
would  be  a  case  of  using  three  evening  papers,  because  the  per- 
centage of  the  duplication  between  the  evening  papers  in  that 
city  is  very  small,  there  being  something  like  25  per  cent  who 
read  more  than  one  evening  paper  regularly.  According  to  our 
results,  the  most  economical  method  of  covering  the  territory 
seems  to  be  the  use  of  one  or  two  morning  and  one  or  two 
evening  papers. 


290  BUSINESS  STATISTICS 

XVIII.  The  Worth  of  Various  Plans  to 
Produce  Circulation  ^ 

By  George  O.  Glavis 

Subscriptions  induced  by  premiums  must  not  be  confused  with 
the  prize  and  rebate  offers  made  to  canvassers.  The  latter 
represent  compensation  for  work  performed,  while  the  former  go 
to  the  subscriber  as  an  inducement,  additional  to  the  value  of  the 
periodical  itself,  for  subscribing. 

Premium  subscriptions  are  in  all  cases  looked  on  with  suspicion 
—  often  merited  —  by  the  Post  Office  Department.  They  are 
not,  however,  excluded  from  the  subscription  list,  provided  the 
subscriber  has  been  required  to  pay,  in  addition  to  not  less  than 
50  per  cent  of  the  subscription  price  of  the  magazine,  an  amount 
equal  to  the  full  retail  selling  price  of  the  premium.  That  does 
not  refer  to  the  cost  of  the  premium  to  the  publisher,  but  the  price 
at  which  the  subscriber  could  buy  it  at  retail. 

Under  that  rule  the  department  accepts  as  legitimate  a  sub- 
scription for  a  premium  selling  at  retail  for  $5.00  and  a  magazine 
with  a  subscription  price  of  $2.00  a  year  only  if  the  subscriber 
paid  at  least  $6.00  for  the  combination.  The  fact  that  the  pub- 
lisher might  obtain  the  premium  for  much  less  than  the  retail 
selling  price  would  have  no  bearing.  Of  course,  there  are  many 
cases  in  which  this  provision  is  evaded,  and  subscriptions  are,  in 
effect,  given  away  to  purchasers  of  merchandise,  which  in  its  turn 
has  been  offered  at  a  very  low  price  compared  with  its  regular 
retail  selling  price.  That  is  one  of  the  many  abuses  of  the  second- 
class  mail  regulations  which  could  readily  be  corrected  should 
publishers  or  others  report  the  violations  to  the  department.  It 
is  a  class  of  circulation  of  the  most  objectionable  character,  and 
the  fact  that  such  practices  exist  makes  it  incumbent  upon  space 
buyers  to  scrutinize  carefully  all  premium  circulation. 

At  the  same  time  it  must  be  remembered  that  there  are  many 
publications  with  which  the  offer  of  a  premium  is  in  no  sense 
objectionable.  That  is  true  in  the  case  of  periodicals  circulating 
to  young  or  otherwise  untrained  readers,  whose  interest  it  is 

^  Printers*  Ink,  August  21,  1913,  pp.  65-72.  Reprinted  by  permission  of 
Printers'  Ink. 


SALES  AND  ADVERTISING  STATISTICS  igi 

necessary  to  catch  by  an  appeal  which  they  will  most  easily  under- 
stand. When  that  is  accomplished  by  the  publisher  a  large 
percentage  of  these  subscribers  may  be  depended  upon  to  become 
interested  readers  and  consequently  valuable  to  the  advertiser. 
Furthermore,  there  are  various  conditions  under  which  premiums 
given  with  some  publications  not  only  assist  in  obtaining  the 
subscriptions  which  the  pubHsher  needs,  but  also  create  an 
interest  in  the  publication  which  the  subscriber  might  not  other- 
wise feel.  Particular  reference  is  had  to  premiums  which  must  be 
used  in  connection  with  the  text  matter  in  the  publication  — 
such,  for  instance,  as  patterns,  cook  books,  plans  and  other 
things  which  are  explained  by  or  in  some  other  way  bear  a  specific 
relation  to  the  text. 

The  number  of  premium  plans  is  so  great  that  it  is  impossible  to 
devote  much  space  to  explain  them  here.  In  valuing  subscriptions 
obtained  in  this  way,  however,  all  of  the  conditions  should  be 
ascertained  and  considered  in  connection  with  the  periodical 
itself.  It  is  especially  necessary  to  consider  the  class  of  people  to 
whom  the  magazine  and  the  premiums  are  expected  to  appeal. 
As  a  general  proposition  it  is  safe  to  begin  such  an  inquiry  with 
the  idea  that  such  subscriptions  do  not  represent  full  buying  power 
for  the  advertiser.  It  will  be  safer  to  work  away  from  that  theory 
than  to  accept  the  value  placed  by  the  publisher  on  premium 
subscriptions  and  work  toward  it. 

In  the  case  of  newspapers  conducting  vigorous  subscription 
campaigns  with  furniture  and  similar  premiums  as  the  bait,  it 
will  undoubtedly  develop  from  an  inquiry  that,  with  the  majority 
of  subscribers,  the  paper  itself  was  given  little  or  no  thought,  but 
that  on  the  contrary  they  bought  the  premium  and  accepted  the 
paper  as  one  of  the  incidental  features  of  the  transaction.  This 
will  be  foimd  to  be  fairly  well  substantiated  by  the  number  of 
cancellations  of  such  orders.  It  is  due  to  the  fact  that  offers  of 
this  kind  do  not  appeal  to  those  who  are  really  interested  in  the 
news,  but  to  a  class  which  reads  newspapers  at  infrequent  inter- 
vals. When  they  tire  of  the  premiiun  or  feel  that  the  instalments 
are  an  unnecessary  burden,  they  cancel  their  order  without 
thought  of  the  paper. 


292  BUSINESS  STATISTICS 

A  class  of  subscriptions  which  may  be  regarded  as  at  least 
similar  to  those  induced  by  premiums  are  those  sent  in  by  "  club 
raisers  "  —  those  pests  by  whom  we  are  all  more  or  less  annoyed 
at  times.  While  it  is  true  that  these  subscribers  receive  no 
premium,  the  "  extraneous  inducement  '^  is  present  in  the  person 
of  the  "  club  raiser  '^  —  usually  a  friend  of  the  subscriber,  or  at 
least  some  one  the  subscriber  desires  to  help  or  encourage.  These 
club  raisers  are  given  merchandise  or  cash  for  their  services  and 
also,  in  many  cases,  a  free  subscription  for  themselves. 

The  majority  of  subscriptions  induced  in  this  way  represent 
persons  who  subscribed  to  help  some  one  or  something  and  not 
through  any  desire  for  the  periodical.  It  is  perhaps  needless  to 
point  out  their  lack  of  value  to  the  advertiser. 

Gift  subscriptions  —  those  which  are  paid  for  although  not  by 
the  recipients  of  the  periodical  —  are,  fortunately,  a  class  which 
is  confined  principally  to  religious  and  educational  and  other 
similar  publications,  to  which  different  standards  of  value  apply 
from  publications  in  other  fields.  In  many  cases  these  are  gifts  of 
single  subscriptions  between  friends,  while  in  others  they  represent 
a  quantity  of  subscriptions  paid  for  from  a  common  fund,  such  as 
those  paid  for  by  a  Sunday  school  for  its  pupils.  In  such  cases 
there  is  no  good  reason  for  objecting  to  this  kind  of  subscription. 

When  the  subscription  list  of  a  general,  or  trade  or  class  pub- 
lication contains  a  considerable  percentage  of  these  gift  —  or 
free  to  the  recipient  —  subscriptions  it  should  be  given  the  most 
painstaking  sort  of  an  examination.  As  a  general  thing,  "  the 
reason  "  will  be  foimd  to  be  one  or  more  advertisers  wishing  to 
direct  the  special  attention  of  certain  persons  to  their  product, 
and  they  look  on  the  periodical  as  better  than  a  direct  appeal  and 
the  most  diplomatic  means  of  accomplishing  that  object.  The 
persons  whose  names  they  send  in  as  subscribers  are  already,  to 
some  extent,  in  touch  with  their  products  and  the  subscriptions 
are  a  courtesy  which  tends  to  increase  their  interest.  Mani- 
festly, however,  such  circulation  is  prejudiced  —  perhaps  unwit- 
tingly —  against  the  goods  of  the  advertising  competitors  of  the 
donor  and  does  not  represent  the  kind  of  buying  power  for  which 
they  should  be  expected  to  spend  their  advertising  money. 


SALES  AND  ADVERTISING  STATISTICS  293 

Furthermore,  when  circulation  of  this  kind  is  accepted  in  large 
quantities  it  would  seem  to  indicate  a  lack  of  demand  for  the 
periodical  by  those  readers  from  whom  the  advertiser  should 
look  for  returns  —  an  editorial  weakness,  perhaps  —  or  else  that 
it  is  dominated  by  one  or  more  advertisers  —  naturally  to  the 
detriment  of  others.  Under  either  condition  such  circulation 
should  stamp  the  publication  as  one  of  questionable  value  to  the 
advertiser.  While  these  gift  subscriptions  in  small  quantities 
may  properly  be  considered  good  circulation,  it  is  none  the  less 
a  safeguard  to  make  sure  of  the  conditions  under  which  they  are 
obtained  before  giving  them  100  per  cent  value. 

One  case  of  gift  subscriptions  of  a  particularly  —  and  for- 
tunately, imusually  —  flagrant  character  was  of  a  periodical 
established  some  years  ago  in  New  England.  Its  circulation 
grew  so  very  rapidly  that  the  postal  facilities  at  the  mailing  office 
were  taxed  beyond  capacity.  Inquiry  developed  that  the  pub- 
lisher had  hit  upon  the  very  simple  plan  of  having  certain  manu- 
facturers give  away  with  each  sale  of  their  product  a  coupon 
calling  for  a  $i.oo-a-year  subscription  upon  presentation  of  the 
coupon  and  the  payment  of  ten  cents.  This  plan  appealed  so 
strongly  that  the  circulation  of  the  magazine  quickly  reached  the 
milHon  mark  and,  what  is  much  more  remarkable,  advertisers 
were  paying  real  money  for  that  circulation.  It  is  well  for  those 
space  buyers  who  look  only  to  the  "  total  guaranteed  circu- 
lation "  that  the  publication  in  question  is  no  longer  in  exist- 
ence. 

It  will  indicate  the  extent  of  this  particular  kind  of  abuse  of  the 
second-class  mail  privileges,  to  say  that  the  department  found  it 
necessary  to  place  in  the  form  of  application  for  second-class 
entry  a  question  asking  the  number  of  such  subscriptions  which 
were  included  in  the  list.  When  the  quantity  was  as  great  as  10 
per  cent  of  the  whole,  special  inquiries  were  made  to  ascertain  the 
facts  concerning  them.  It  frequently  happened,  as  a  result  of 
these  inquiries,  that  such  a  close  connection  was  established 
between  the  publisher  and  advertiser,  or  others  paying  for  the 
subscriptions,  that  entry  of  the  publication  was  refused  on  the 
ground  that  the  facts  concerning  this  one  class  of  circulation 


294  BUSINESS  STATISTICS 

proved  the  publication  was  "  designed  primarily  for  advertising 
purposes  or  for  free  circulation,"  or  both,  and  therefore  not 
admissible  under  the  law. 

It  is,  of  course,  to  be  understood  that  in  some  cases  of  this 
character  the  publisher  receives  payment  only  indirectly,  in  that 
the  giving  of  the  subscriptions  is  made  part  of  the  advertising 
agreement,  and  the  only  payment  actually  made  is  that  for  the 
space.  When  arrangements  of  this  kind  are  entered  into  between 
a  publisher  and  an  advertiser,  their  entire  want  of  equity  will  be 
understood  when  it  is  pointed  out  that  similar  concessions  are  not 
made  to  all  advertisers  but  only  to  a  favored  few  —  those,  for 
instance,  with  whom  it  is  hard  to  close  and  to  whom,  for  that 
reason,  the  publisher  offers  the  subscriptions  as  an  extra  induce- 
ment. 

The  variations  of  this  class  of  subscriptions  were  so  great  at 
one  time  that  the  department  had  twenty-eight  different  rulings 
affecting  them,  all  of  which  had  to  be  made  from  time  to  time 
either  to  meet  actual  conditions  which  were  found  or  to  conform 
to  the  pressure  brought  to  bear  on  the  department  by  the 
publishers  affected. 

Expired  subscriptions  represent  another  important  circulation 
question,  and  many  views  are  expressed  for  and  against  the 
practice  adopted  by  some  publishers  of  carrying  such  names  on 
their  subscription  lists. 

Until  about  six  years  ago  the  Post  Office  Department  had  not 
promulgated  any  definite  ruling  to  govern  the  length  of  time  after 
expiration  during  which  such  subscriptions  would  be  recognized 
as  a  permissible  part  of  the  list  of  subscribers  which  the  law 
requires  for  a  publication  mailed  at  the  second-class  rates.  At 
that  time  the  department  modified  the  regulations  and  held 
that  "  unless  subscriptions  are  expressly  renewed  after  the  term 
for  which  they  are  paid  within  the  following  periods:  Dailies 
within  three  months;  tri- weeklies  within  six  months;  semi- 
weeklies  within  nine  months;  weeklies  within  one  year;  semi- 
monthlies within  three  months;  monthlies  within  four  months; 
quarterlies  within  six  months,  they  shall  not  be  counted  in  the 
legitimate  list  of  subscribers." 


SALES  AND  ADVERTISING  STATISTICS  295 

That  amendment  to  the  postal  regulations  brought  forth  a 
storm  of  criticism  which  was  heard  in  every  Congressional  district 
in  the  land.  It  came  principally  from  those  publishers  who  held 
names  on  their  lists  until  all  arrears  were  paid  and  the  publica- 
tions ordered  stopped.  Until  the  promulgation  of  that  order  by 
the  department  there  were  many  publishers  whose  subscription 
orders  were  on  a  "  till  forbid  "  basis,  and  many  of  them,  rather 
than  take  a  chance  of  losing  a  "  subscriber,"  carefully  refrained 
from  doing  anything,  such  as  sending  out  a  bill,  which  might 
raise  any  question  in  the  mind  of  the  subscriber  as  to  whether  or 
not  the  publication  was  still  wanted. 

Protests  were  also  made  against  the  ruling  by  certain  publishers 
who  object  to  any  action  on  the  part  of  the  Government  which 
they  feel  might  be  construed  as  an  attempt  to  curtail  the  much- 
talked-of  liberty  of  the  press.  Others  objected  because  they  could 
not  understand  how  the  department  arrived  at  the  credit  periods 
for  the  several  frequencies  of  issue,  and  so  far  as  is  known,  this 
information  has  never  been  disclosed. 

The  criticisms  finally  developed  sufficient  strength  to  induce 
the  department,  in  191 1,  to  modify  its  ruling  so  that  at  this  time 
a  publisher  may  give  credit  for  one  year  regardless  of  how  often 
his  publication  is  issued. 

So  far  as  the  Post  Office  is  concerned,  the  above  explains  what 
may  be  done  in  the  matter  of  expired  subscriptions,  but  the  pro- 
priety of  the  practice  of  carrying  names  after  the  expiration  of  the 
paid-for  period,  except  in  certain  extraordinary  cases  and  under 
special  conditions,  is  a  debatable  question,  and,  like  many  other 
circulation  questions,  depends  upon  the  publication  itself  and  the 
conditions  surrounding  its  distribution. 

One  of  a  series  of  subscription  renewal  letters  sent  out  by  an  old 
established  industrial  paper  contains  some  interesting  statements 
concerning  the  propriety  of  carrying  names  on  the  list  in  the 
absence  of  instructions  to  renew,  and  frankly,  the  statements  are 
opposed  to  my  point  of  view.  This  publisher  states  that  if  he 
had  cut  off  on  January  first  all  subscriptions  which  expired  with 
December  he  would  have  been  put  to  an  expense  of  $5,000  to 
restore  the  names  of  those  who  renewed  within  three  months. 


296  BUSINESS  STATISTICS 

With  respect  to  that  statement  it  might  be  pointed  out  that 
$5,000  will  pay  for  many  changes  in  a  mailing  list  regardless  of  the 
system  used.  Assuming  that  the  expense  would  be  two  cents  per 
name,  that  sum  would  represent  the  restoration  to  the  list  of 
250,000  subscribers.  If  the  percentage  of  renewals  in  the  three 
months  was  50  per  cent,  then  half  a  million  subscriptions  must 
have  expired  in  December.  Such  a  number  undoubtedly  repre- 
sents a  considerable  portion  of  the  whole  list  and  suggests  the 
advisability,  as  a  measure  of  economy  and  precaution,  of  a  read- 
justment of  methods  so  that  the  expirations  throughout  the  year 
would  be  distributed,  as  nearly  as  is  feasible,  to  make  a  like  num- 
ber expire  each  month,  rather  than  to  have  the  bulk  of  the 
expirations  occur  in  any  single  month.  Such  an  arrangement 
would  make  it  easier  for  the  subscription  department  to  handle 
the  list  and  also  would  enable  the  publisher  at  any  time  to  change 
his  practice,  should  he  so  desire,  and  remove  names  immediately 
upon  expiration,  without  creating  an  abnormal  decrease  of  cir- 
culation in  a  month  of  such  importance  as  the  first  one  in  the 
year. 

This  publisher,  however,  is  unquestionably  well  within  his 
rights  in  his  present  methods,  and  the  only  question  for  him  to 
decide  seems  to  be  whether  or  not  the  hst,  with  such  a  number  of 
unpaid  subscriptions,  is  to  the  fullest  extent  productive  to  the 
advertiser.  On  the  other  hand,  the  publisher  may  feel  that  to  be 
a  question  which  the  advertiser  should  determine  without  his 
assistance. 

As  a  matter  of  actual  practice,  though,  the  renewal  of  the  sub- 
scription of  an  interested  reader  may,  as  a  general  thing,  be 
obtained  just  as  readily  before  expiration  as  afterwards  —  it  is 
almost  entirely  a  question  of  office  methods.  For  that  reason,  to 
make  a  regular  practice  of  carrying  expired  subscriptions  seems 
to  be  a  mistake. 

The  practice  also  has  an  undesirable  effect  on  the  readers 
because  they  all  too  frequently  consider  that  they  are  under  no 
obHgation  to  pay  for  pubHcations  which  they  have  not  expressly 
ordered.  Many  of  them  are  no  longer  interested  but  inten- 
tionally neglect  to  order  the  paper  discontinued  on  the  assumption 


SALES  AND  ADVERTISING  STATISTICS  297 

that  their  names  will  be  dropped  automatically.  It  follows,  as  a 
matter  of  course,  that,  not  being  interested,  they  are  of  no  pos- 
sible value  to  the  advertiser  and,  feeling  that  it  is  being  forced 
upon  them,  they  probably  develop  an  unfriendly  feeling  for  the 
paper.    Are  not  such  names  better  off  the  list  than  on  ? 

There  seems  no  justification  for  keeping  them  on,  except  a  dis- 
inclination to  make  a  material  reduction  in  the  mailing  Ust,  as 
that  constitutes  an  important  talking  point  for  the  space  seller. 
Any  advantage  of  holding  such  names,  however,  is  offset  by  the 
expense  and  the  fact,  so  often  overlooked  by  publishers,  that  a 
strictly  paid-in-advance  subscription  list  is  an  argument  second 
to  none  to  the  careful  space  buyer. 

To  the  advertiser  the  practice  of  carrying  expired  subscriptions 
is  necessarily  objectionable  and  it  is  certainly  unfair  to  include 
them,  without  the  knowledge  of  the  advertiser,  particularly  when 
the  advertising  rate  is  based  on  the  size  of  the  subscription  list. 

The  only  salable  circulation  is  that  for  which  payment  has  been 
made  or  promised,  actually  and  not  by  inference.  If  expired  sub- 
scriptions are  included  in  the  claimed  circulation,  the  advertiser 
should  ascertain,  if  not  told  by  the  publisher,  what  percentage 
they  represent  of  the  entire  list. 

An  important  point  to  be  considered  in  connection  with  the 
auditing  of  a  Hst  carrying  a  material  percentage  of  expired  sub- 
scriptions is  how  they  are  to  be  accounted  for  in  the  audit  so  that 
no  injustice  may  be  done  the  publisher  and  also  that  the  adver- 
tiser may  be  fully  protected.  Is  the  publisher  to  be  given  full 
credit  for  them  without  reference  to  the  essential  fact  that  they 
have  expired,  simply  because  the  postal  regulations  allow  the 
publisher  to  carry  them  for  a  year,  or  are  the  number  and  the 
length  of  time  for  which  they  are  unpaid  to  be  reported  ? 

It  would  seem  important  in  such  cases  for  the  auditor  to  go 
back  over  the  records  of  the  publisher  and  determine  the  percent- 
age of  renewals  and  the  percentage  of  persons  who  permit  the 
publication  to  come  for  one  or  two  or  three  months  and  so  on  up 
to  the  limit  of  a  year  before  directing  cancellation. 

The  number  who  cancel  and  pay  for  the  fraction  of  the  year 
during  which  the  paper  has  been  sent  after  expiration  is  also 


298  BUSINESS  STATISTICS 

valuable  data.  Such  persons  would  constitute  the  part  —  the 
only  part  in  fact  —  of  the  expired  circulation  for  which  the  adver- 
tiser might  reasonably  be  expected  to  pay  without  feeling  that  he 
was  being  mulcted. 

It  seems  no  more  defensible  to  claim  expired  subscriptions  as 
bona  fide,  when  their  continuance  has  not  been  requested,  than 
to  count  as  "  sold  "  all  copies  furnished  newsdealers  for  sale  with 
the  privilege  of  returning  unsold  copies  —  making  no  allowance 
for  the  number  of  copies  to  be  returned. 

As  stated  before,  this  question  of  expired  subscriptions  is  a 
debatable  one,  and  it  is  fully  realized  that  the  views  expressed 
here  will  not  meet  with  the  approval  of  many  publishers  conduct- 
ing their  business  on  a  strictly  legitimate  basis  and  giving  full 
value  to  the  advertiser.  The  opposition  views  would  be  of 
interest  and  should  assist  advertisers  in  reaching  a  conclusion  on 
this  subject. 

XIX.  Analysis  of  Newspaper  Circulation  ^ 

By  E.  G.  Pratt 

What  should  the  special  representative  furnish  in  his  solicita- 
tion to  manufacturers  and  advertising  agencies,  in  the  way  of 
dependable  facts  ? 

Newspapers  are  the  expressions  of  different  personalities  and 
they  make  different  appeals.  The  agent  who  is  in  possession  of 
all  of  the  facts  is  enabled  to  make  a  more  accurate  choice  between 
newspapers  to  be  used  in  any  given  campaign.  Competitive 
solicitation  places  the  agent  today  in  possession  of  many  facts, 
but  they  too  often  come  in  the  way  of  a  knock  by  one  paper  upon 
another,  and  not  in  a  constructive  way. 

We  all  know  how  interdependent  newspapers,  billboards,  paint, 
street  cars  and  all  the  other  local  advertising  media  are,  and, 
although  the  newspaper  is  not  expected  to  "  close  "  business  for 
the  paint  or  street-car  men,  yet  knowing  his  local  field,  he  should, 
as  many  do,  make  it  a  part  of  the  solicitation  to  impart  his 
knowledge  to  the  advertising  agencies. 

^  Printers'  Ink,  July  2,  1914,  pp.  73-74.  Reprinted  by  permission  of  Printers' 
Ink, 


SALES  AND  ADVERTISING  STATISTICS  299 

Most  large  cities  and  many  small  towns  have  peculiarities 
of  their  own  that  make  them  react  differently  to  the  influence  of 
local  advertising.  They  differ  from  the  standpoint  of  custom,  of 
dwelling  conditions,  of  social  cleavages,  of  marketing  problems, 
of  retailing  difficulties,  of  consumer  preferences,  of  geographical 
conditions,  any  of  which,  if  ignored,  is  likely  to  influence  an 
advertising  campaign.  Following  are  some  of  the  questions  we 
would  like  to  have  answered : 

First  of  all,  how  much  net  paid  circulation  ? 

It  is  hard  for  the  publisher,  who  has  long  misquoted  his  circu- 
lation, to  realize  what  would  happen  if,  when  buying  his  raw 
material,  some  50  per  cent  of  paper  or  presses  were  not  delivered 
by  the  manufacturer.  It  is  an  analogous  case  when  the  circulation 
is  not  delivered  to  the  advertiser. 

Is  the  circulation  guaranteed  ?    How  ? 

Is  the  circulation  regularly  audited  ?    By  whom  ? 

How  much  gross  press  run  ? 

Are  unsold  copies  returnable  ? 

How  much  of  the  circulation  is  urban  ? . 

How  much  suburban  ? 

How  much  street  sales  ? 

How  much  R.  F.  D.  ? 

We  all  recognize  that  after  a  certain  point  in  a  newspaper's 
circulation  has  been  reached,  the  remainder  has  to  be  "  sold.'' 
For  this  reason  it's  important  to  know: 

How  the  circulation  is  obtained  ? 

What  percentage  direct  maihng,  sample  copies,  premiums,  clubbing  oiOFers, 
canvassers,  crews,  boys,  partial  payments,  coupons,  gift  subscriptions  ? 
With  what  other  papers  and  to  what  extent  does  a  paper  duplicate  ? 

From  the  viewpoint  of  editorial  policy,  we  should  like  to  know: 

What  per  cent  of  men  readers  ? 
What  per  cent  of  women  readers  ? 

Is  there  a  woman's  page  —  on  what  day  is  it  published  —  does  it  carry 
advertising  ? 

Is  there  a  sporting  page  ? 

Is  there  a  financial  page  ? 

Is  there  a  society  page  ? 

Is  there  a  "  want  ad  "  page  ? 

What  special  features,  like  a  pure-food  page  ? 


300  BUSINESS  STATISTICS 

With  regard  to  quality  of  circulation: 

What  amount  of  advertising  was  carried  in  19 13  ?  In  the  first  six  months 
of  1914  ?  Amount  of  local  display  ?  Amount  of  exclusive  local  display  — 
department  store  —  automobile  —  financial  —  quahty  shop  advertising  — 
basement-sale  advertising  ? 

Also  the  amount  of  foreign  advertising  ? 

Amount  of  patent  medicine  advertising  ? 

Which  days  of  the  week,  taking  a  t3^ical  month,  carried  the 

most  advertising  of: 

Department  stores  ? 
Grocery  products  ? 
Specialty  shops  ? 
Toilet  goods  ? 
Financial  advertising  ? 
Automobile  and  accessories  ? 
Transportation  companies  ? 

Are  local  rates  same  as  foreign  ? 

What  class  of  advertising  is  refused  ? 

Is  cash  discount  or  agency  discount  paid  to  advertisers  direct  ? 

Classification  of  readers,  according  to  occupation,  if  possible, 
would  be  of  help. 

Charts  of  cities  showing  rental  divisions,  according  to  whether 
the  rentals  are  below  $25  a  month,  between  $3S-$5o  a  month  and 
over,  and  then  give  us  the  circulation  in  these  exact  districts. 

Give  a  list  of  the  advertisers  who  have  used  the  paper  consist- 
ently. 

Give  us  information  regarding  the  purchasing  capacity  of  the 
reader. 

Testimonials  from  local  dealers  regarding  the  influence  of  the 
newspaper  to  produce  sales  at  retail  stores. 

The  amount  of  advertising  which  dealers  have  paid  for  as  a 
result  of  national  campaigns  of  the  manufacturer,  and  what  help 
is  offered  the  manufacturer  or  agent  to  secure  local  dealer 
advertising. 

Analysis  of  the  Field 

Different  cities  and  towns  —  Boston,  Chicago,  Toronto,  Mon- 
treal, Yarmouth,  Dallas,  Montclair  —  have  very  distinct,  com- 
plexions, and  so  we  are  interested  in: 


SALES  AND  ADVERTISING  STATISTICS  3OI 

The  urban  and  suburban  population. 

The  trading  zone. 

The  geographical  divisions  and  their  buying  tendencies. 

The  number  of  families  —  their  nationalities. 

Transportation  lines  —  the  distances  from  other  cities. 

Bank  deposits  and  clearings. 

Country  trade  —  number  of  farmers. 

How  strongly  the  competition  of  mail-order  houses  has  developed. 

How  much  the  chain  store  has  become  entrenched. 

The  number  of  industrial  establishments  and  the  number  of  their  em- 
ployees. . 

Advertised  products  which  are  manufactured  locally. 

Where  the  residential  districts  are  —  the  manufacturing  district  —  the 
retail  district. 

The  local  expenditure  in  canned  goods  —  men's  clothing  —  children's 
clothing. 

Rules  governing  the  sale  of  certain  preparations;  for  example,  those  con- 
taining alcohol. 

The  number  of  department  stores  —  their  general  character. 

The  number  of  drug  retailers  —  of  grocery  retailers  —  of  hardware  re- 
tailers —  of  auto  and  accessories  dealers. 

A  list  of  the  important  ones. 

Number  of  jobbers  in  these  lines  —  general  character. 

A  list  of  the  prominent  ones. 

The  approximate  amount  of  business  done  in  each  classification. 

We  could  use  to  advantage  a  list  of  department  stores  in  a  city 

showing: 

Name  of  paper  pattern  sold. 

Those  with  toilet  goods  departments  and  the  names  of  the  buyers. 

Grocery  departments. 

House  furnishing  departments. 

Furniture  departments. 

Dress  goods  departments. 

Wash  goods  departments. 

Underwear  departments. 

Carpet  departments. 

Music  departments. 

Trunk  departments. 

Toy  departments. 

Shoes  —  men's,  women's  and  children's. 

Clothing  —  men's,  women's  and  children's. 

The  department  store  in  a  city  which  sells  the  largest  amount 

of: 

Pianos  and  other  musical  instruments  —  cheap  —  high  grade. 
Toilet  goods  —  cheap  —  high  grade. 


302  BUSINESS  STATISTICS 

Groceries  —  cheap  —  high  grade. 

House  furnishing  goods  —  cheap  —  high  grade. 

Furniture  —  cheap  —  high  grade. 

Carpets  —  cheap  —  high  grade. 

Trunks  —  cheap  —  high  grade. 

Toys. 

Dress  goods. 

Wash  goods. 

Underwear  and  hosiery  —  men's  —  women's. 

Corsets. 

Men's  shoes. 

Women's  shoes. 

Ready-to-wear  dresses. 

Woolens  and  worsteds. 

Millinery. 

Infants'  wear. 

One  publisher  in  New  York  has  just  concluded  a  canvass  of 
I, GOO  stores  in  each  of  four  lines,  to  determine  the  trade-marked 
articles  demanded  and  the  order  of  their  sales.  Another  in 
Washington  has  worked  out  a  comprehensive  plan  of  cooperation 
between  manufacturer  and  retailer,  to  increase  the  sale  of  goods 
advertised  in  this  particular  paper.  A  Philadelphia  paper,  through 
its  promotion  department,  has  rendered  real  service  in  its  analysis 
of  its  city.  Several  Chicago  newspapers  have  made  a  compre- 
hensive analysis  of  Chicago's  population  and  the  newspapers' 
circulations. 


XX.  What  the  Advertiser  Pays  For^ 

By  Roy  W.  Johnson 

When  the  solicitor  for  a  publication  approaches  the  advertiser 
with  reasons  why  his  medium  is  entitled  to  a  part  of  the  appro- 
priation, he  is  usually  able  to  name  a  definite  quantity  of  circu- 
lation. Quite  frequently  he  is  able  to  tell  how  much  of  it  is  in 
Kansas,  or  Oklahoma,  or  in  any  section  of  the  country  the  adver- 
tiser may  be  interested  in.  Probably  he  can  tell  what  proportion 
of  the  total  is  in  cities  of  the  first  class,  how  much  in  cities  of 
50,000  to  100,000,  and  so  on  down  to  the  rural  districts.    He  has 

1  Printers'  Ink,  February  20,  1913,  pp.  33-36;  February  27,  1913,  pp.  45-50- 
Reprinted  by  permission  of  Printers'  Ink. 


SALES  AND  ADVERTISING  STATISTICS  303 

it  nicely  tabulated  in  plain  figures,  and  it  is  easy  sailing  because 
he  is  dealing  with  definite,  concrete  facts. 

But  when  he  comes  to  the  quality  of  his  circulation,  he  at  once 
begins  to  flounder.  Perhaps  he  shows  a  bunch  of  letters  from 
subscribers  praising  something  the  publication  has  said  or  done; 
maybe  he  produces  a  crop  of  claims  of  great  results  accomplished 
in  some  reform  or  other;  once  in  a  while  he  will  demonstrate  that 
10  per  cent  of  the  subscribers  are  doctors,  2  per  cent  are  preachers, 
etc.  Occasionally  he  comes  armed  with  documents  signed  by 
subscribers  themselves,  in  which  confession  is  made  as  to  the 
amount  of  salary  drawn  by  the  head  of  the  house,  the  make  of 
bicycle  ridden  by  the  yoimgest  brother  and  the  player  piano  pur- 
chased by  the  rich  uncle.  This  might  be  useful  if  there  was  any 
way  to  secure  similar  statements  from  all  subscribers,  and  any 
means  of  insuring  the  truth  of  the  returns,  but  there  isn^t  in  all  the 
various  kinds  of  evidence  presented  any  reliable  index  as  to  the 
real  hold  the  publication  has  upon  all  these  doctors  and  preachers, 
etc.  Mrs.  Smith,  of  Smith's  Comers,  may  or  may  not  possess  a 
talking  machine,  but  how  much  confidence  has  she  in  what  this 
publication  has  to  say  ?  The  column  rule  which  separates  adver- 
tising from  reading  matter  has  no  magic  power  to  transform  the 
mental  attitude  of  the  person  whose  eye  travels  across  it. 

The  solicitor  can  give  plenty  of  figures  about  quantity,  but 
when  it  comes  to  quality  he  usually  talks  about  percentages,  or 
contents  himself  with  oratory.  Neither  is  any  true  index  to 
quality  of  circulation,  which  is  a  term  inclusive  not  only  of  the 
kind  of  people  who  buy  the  publication,  but  of  the  mental  attitude 
they  cherish  toward  it. 

Yet  the  question  as  to  which  of  two  publications  to  patronize 
often  hinges  upon  this  very  question  of  the  quality  of  the  circula- 
tions, and  as  a  rule  the  advertiser's  only  recourse  is  to  give  the 
business  to  the  solicitor  with  the  best  line  of  talk,  or  to  judge  by 
a  study  of  the  publications  themselves  and  inquiry  among  other 
advertisers  who  use  them.  Now  there  is  no  better  method  of 
fooKng  one's  self  than  the  system  of  judging  the  value  of  an 
advertising  mediimi  by  personal  opinion  of  its  contents.  The 
man  who  is  manufacturing  scented  soap  may  have  a  supreme 


304  BUSINESS  STATISTICS 

contempt  for  "slushy  love  stories";  and  he  may  think  the 
editorial  policy  of  a  paper  absolutely  idiotic;  but  what  he  thinks 
about  it  doesn't  count.  When  it  comes  to  selling  soap,  the  only 
thing  that  counts  is  what  its  readers  think  about  it. 

Results  obtained  by  other  advertisers  are  hardly  more  reliable 
as  a  guide.  A  man  can  scarcely  ask  that  information  of  his  com- 
petitors, and  the  experience  of  those  in  different  lines  of  business 
may  be  extremely  misleading.  A  medium  which  pulled  big 
returns  for  mail-order  clothing  might  fall  down  seriously  when  it 
came  to  sending  the  reader  to  the  local  dealer  for  shoes.  If  the 
purchase  of  advertising  space  is  ever  going  to  be  put  upon  a  basis 
of  anything  Kke  pure  ej6&ciency  it  will  need  a  better  standard  of 
measurement  than  that. 

What  is  wanted  is  a  yardstick  which  will  measure  quality.  We 
are  requested  to  pay  a  certain  rate  for  the  advertising  value  of  a 
certain  publication.  Is  it  a  fair  rate  ?  We  don't  know  until  we 
have  measured  the  value  it  is  supposed  to  pay  for.  It  is  like  a 
little  problem  in  geometry:  here  is  a  rectangle  which  represents 
the  rate.  We  are  to  construct  a  rectangle  to  represent  the  adver- 
tising value  of  the  publication,  and  if  the  two  rectangles  coincide 
(within  reasonable  limits,  of  course)  it  is  a  fair  rate.  We  have  got 
the  base  of  our  advertising  value  rectangle  in  the  quantity  of 
circulation,  but  the  altitude  (the  quality  of  circulation)  is 
unknown. 

Take  as  a  specific  example  two  publications.  Publication  A  has 
a  circulation  of  2,000,000  and  a  rate  of  $8  per  line.  Publication  B 
has  a  circulation  of  2,000,000  and  a  rate  of  $5  per  line.  If  those 
rates  are  fair,  there  must  be  a  big  difference  in  the  quality  of  the 
circulations  —  in  the  altitudes  of  the  rectangles  which  represent 
the  advertising  values.  What  the  advertiser  wants  is  some  stand- 
ard of  measurement  besides  guesswork. 

He  will  find  it,  I  believe,  in  the  cost  of  production  of  the  pub- 
lications in  question  —  not,  be  it  noted,  the  cost  of  either  pub- 
lication to  its  individual  pubUsher,  but  the  cost  which  must  be 
met  by  any  other  publisher  who  would  duplicate  the  publication. 
This  qualification  is  necessary  because  an  individual  publisher 
might  own  a  print  shop  and  use  the  publication  to  take  up  slack 


SALES  AND  ADVERTISING  STATISTICS  3 05 

in  his  press  room,  or  in  other  ways  might  get  out  the  paper  cheaper 
than  another  could. 

The  influence  a  publication  has  with  its  readers  —  which  is 
quality  of  circulation  in  other  terms  —  is  in  the  long  run  relatively 
proportionate  to  the  cost  of  production  of  the  publication.  If  an 
advertiser  could  get  hold  of  a  publisher's  annual  balance-sheet  he 
ought  to  be  able  to  judge  of  the  quality  of  the  circulation  of  the 
publication  to  a  T. 

Now  right  here  is  a  good  place  to  stop  and  explain  that  this 
article  does  not  maintain  that  the  cost  of  production  of  a  publica- 
tion is  "  all  there  is  to  "  the  question  of  quality,  or  that  the  only 
thing  necessary  to  build  up  quality  circulation  is  to  blow  a  barrel 
of  money  on  ink,  paper  and  sensations.  What  this  article  does 
maintain  is  this:  That  there  is  a  close  relationship  between  the 
cost  of  production  and  quality  of  circulation,  because,  primarily, 
the  publisher  wouldn't  spend  the  money  unless  it  were  necessary 
in  order  to  get  the  quality.  If  he  is  spending  it  to  get  mere 
quantity,  by  giving  big  premiums,  etc.,  or  if  he  is  spending  too 
much  to  get  business,  those  facts  will  appear  from  a  study  of  the 
publication  as  outlined  hereafter.  The  publisher  must  take  the 
cost  of  production  into  consideration  when  he  is  fixing  his  rates, 
if  he  wants  to  be  sure  of  being  in  business  another  year,  and  the 
advertiser  should  take  it  into  consideration  because  it  is  an 
index  to  the  publisher's  efforts  to  make  the  right  kind  of  a 
paper.  The  cost  of  production  is  the  cornerstone  of  an  equitable 
advertising  rate  and  the  most  trustvv^orthy  guide  an  advertiser 
can  have  to  the  quality  of  circulation,  which  means,  of  course, 
that  the  cost  of  production  is  a  trustworthy  index  to  the  fairness 
of  an  advertising  rate. 

The  old  idea  used  to  be  (some  advertisers  cling  to  it  even  now) 
that  advertising  rates  were  based  upon  quantity  of  circulation 
only.  If  that  were  true  there  ought  to  be  a  standard  rate  for  the 
standard  unit  of  measurement.  In  other  words,  if  the  number  of 
copies  circulated  is  an  equitable  measure  of  the  value  of  a  pub- 
lication, publications  circulating  the  same  number  of  copies 
should  demand  the  same  rate,  and  all  rates  should  be  reducible 
to  one  fixed  standard  of  so  much  per  line  per  thousand  copies. 


3o6  BUSINESS  STATISTICS 

As  a  matter  of  fact  we  don't  find  anything  like  a  "  standard 
rate." 

The  World's  Work  gets  four-fifths  of  a  cent  per  line  per  thou- 
sand; the  Saturday  Evening  Post  gets  two-fifths  of  a  cent;  Har- 
per'sMagazine  gets  between  a  cent  and  a  quarter  and  a  cent  and  a 
third;  Woman's  World  gets  two-fifths  of  a  cent;  Vogue  gets  a 
cent  and  a  third;  T/je  ^rgc^^^^  gets  two-fifths  of  a  cent;  and  so  on. 
Among  daily  newspapers,  the  New  York  Journal  gets  about  one- 
fourteenth  of  a  cent;  the  Boston  Transcript  gets  half  a  cent; 
the  Chicago  Tribune  gets  one-sixth;  the  San  Francisco  Chronicle 
gets  a  quarter  of  a  cent. 

So  it  is  evident  that  there  is  no  standard,  immutable  rate  per 
line  per  thousand  to  which  all  publications  must  conform. 
Neither  is  it  true  that  the  publisher  fixes  an  arbitrary  value  upon 
the  quality  of  his  circulation  per  thousand  (say,  a  value  of  half  a 
cent  a  line)  and  proceeds  to  charge  at  that  rate  for  every  thousand 
new  subscribers  he  secures.  Quite  the  contrary.  As  the  circula- 
tion increases  we  usually  find  the  rate  per  line  per  thousand 
coming  gradually  down.  Advertising  rates  do  not  increase  in 
anything  like  the  same  proportion  that  circulations  do. 

Here  is  a  list  presented  at  random,  including  magazines,  news- 
papers, class  and  trade  journals,  showing  the  relative  rates  of 
increase  of  advertising  rates  and  circulations  covering  a  period  of 
ten  years,  taken  from  the  publishers'  own  statements : 

Circulation  Adv.  rate 

Name  of  paper  increased  increased 

%  % 

The  Automobile 500  100 

Topeka,  Kan.,  Capital 306  66f 

Lippincott's 25  None 

Farm  Press 564  500 

Sunset 200  100 

Christian  Herald  (6  years) 51  26 

Interstate  Grocer 275  75 

Arkansas  Homestead 300  40 

American  Exporter 120  33 

Cleveland  Plain  Dealer  (6  years) 64  30 

It  is  quite  true  that  the  ratios  between  the  increase  of  circula- 
tions and  the  increase  of  rates  are  not  constant.    That  is  because 


SALES  AND  ADVERTISING  STATISTICS  307 

there  is  so  much  variation  in  the  increases  of  mechanical  costs, 
editorial  costs,  etc.,  as  between  one  publication  and  another.  For 
example,  one  paper,  the  Portland,  Me.,  Express,  reports  an  in- 
crease of  75  per  cent  in  the  advertising  rates  and  an  increase  of 
but  60  per  cent  in  circulation.  But  upon  further  examination  we 
find  that  the  paper's  art  department  costs  186  per  cent  more  than 
ten  years  ago,  its  editorial  costs  have  increased  216  per  cent, 
mechanical  costs  143  per  cent,  rent  198  per  cent,  and  business 
department  305  per  cent.  Yet  if  the  advertising  rates  were  based 
on  the  circulation  a  60  per  cent  raise  would  be  the  utmost  limit. 

This  is  exactly  where  the  cost  of  production  comes  in.  The 
publisher  must  add  enough  to  his  advertising  rates  to  cover  any 
increased  expenditure  which  he  makes  for  the  purpose  of  increas- 
ing the  quahty  of  his  circulation,  and  the  advertiser  who  wants 
that  quality  must  be  willing  to  pay  for  it.  If  the  advertiser  is  to 
consider  himself  well  posted  he  cannot  ignore  the  subject  of  cost 
of  production. 

Every  advertising  solicitor  knows  how  hard  it  is  to  "  put 
over  "  a  raise  in  the  rates.  The  advertiser  who  has  contentedly 
paid  forty  cents  a  Hue  for  months  kicks  like  a  brindled  heifer  if 
asked  to  pay  forty-five,  even  when  it  is  easy  to  demonstrate  that 
he  is  getting  a  50  per  cent  increase  in  circulation.  The  solicitor 
can  sit  down  and  figure  it  out  on  a  piece  of  paper,  showing  that 
the  rate  is  actually  lower  per  thousand  than  when  the  advertiser 
began  to  pay  the  forty  cent  rate,  yet  the  latter  will  insist  that 
forty-five  cents  is  too  much.  And  the  solicitor  has  to  work  hard 
to  save  the  business,  simply  because  he  hasn't  any  way  —  except 
talk —  of  proving  that  the  space  is  worth  the  new  rate. 

George  Von  Utassy,  of  Cosmopolitan,  says:  "  If  the  magazine 
pays  him  it  is  a  good  investment;  if  it  doesn't  it  is  not."  That  is 
true  without  question  for  an  advertiser  who  can  trace  results. 
But  such  advertisers  are  in  the  minority.  By  actual  count  it  was 
determined  that  60  per  cent  of  the  advertisers  in  standard  maga- 
zines —  advertisers  Hke  the  American  Telephone  and  Telegraph 
Company,  for  example  —  could  not  possibly  trace  any  results 
from  the  individual  publication.  Unquestionably  these  adver- 
tisers are  satisfied  with  the  results,  but  they  cannot  trace  them. 


3o8  BUSINESS  STATISTICS 

Moreover,  the  advertiser  who  is  only  considering  the  use  of  a 
publication  wants  some  definite  indication  as  to  whether  it  would 
be  likely  to  pay  him  or  not.  Likewise  the  advertiser  who  is  asked 
to  pay  a  higher  rate  wants  the  assurance  that  the  quality  of  the 
circulation  makes  it  worth  the  extra  money.  As  a  rule,  he  doesn't 
doubt  the  quantity. 

The  H.  K.  McCann  Company,  New  York,  has  made  a  good 
start  towards  a  system  of  gauging  the  value  of  farm  paper  space 
by  something  more  scientific  than  guesswork,  hearsay  or  solici- 
tors' arguments.  Opposite  the  names  of  the  various  papers  are 
set  down  the  subscription  prices;  the  quality  of  print  paper 
(good,  fair  or  poor) ;  the  number  of  illustrations  in  an  average 
issue;  the  number  of  people  on  the  editorial  staff;  the  relative 
number  of  pages  which  appeal  to  women;  whether  or  not  there 
is  a  strong  personality  back  of  the  papers;  and  a  column  for 
entering  an  A,  B,  C,  or  D  classification  according  to  the  informa- 
tion contained  in  the  other  columns.  It  is  a  good  start,  but  it  is 
not  complete.  It  does  not  provide  for  all  the  factors  which  may 
go  to  make  a  given  medium  worth  the  line  rate.  For  example,  a 
paper  which  has  done  a  great  deal  of  work  educating  dealers  to 
the  advantages  of  handling  advertised  goods  would  get  no  credit 
for  it,  and  a  paper  with  an  editorial  staff  of  two  might  buy  enough 
outside  contributions  from  specialists  to  make  it  worth  far  more 
than  the  paper  with  a  staff  of  half  a  dozen  tyros.  Moreover,  the 
subscription  price  may  be  $3  a  year,  but  if  the  farmer  gets  the 
paper  handed  to  him  as  a  premium  with  a  patent  corn  sheller 
bought  at  the  last  county  fair  he  cannot  be  rated  as  a  three-dollar 
subscriber. 

I  believe  that  a  chart  can  be  worked  out,  with  the  cost  of  pro- 
duction of  the  publication  (as  nearly  as  the  advertiser  can  get  at 
it  of  course)  as  a  basis,  which  will  give  an  approximately  accu- 
rate indication  as  to  whether  the  rate  demanded  is  just  or  exces- 
sive or  too  low.  It  may  seem  as  if  "  too  low  "  a  rate  were  a  joke, 
but  it  isn't,  either  for  the  advertiser  or  the  pubHsher.  Too  low 
a  rate  means  one  of  two  things:  failure  and  discontinuance  of  the 
publication,  or  a  cutting  of  the  cost  in  some  department  which 
will  pull  the  quality  of  the  circulation  down  to  meet  the  rate. 


SALES  AND  ADVERTISING  STATISTICS  309 

Advertising  space  is  a  manufactured  article,  and  too  low  a  price 
has  an  effect  upon  it  quite  as  truly  as  if  it  were  dress  goods  or 
steel  rails. 

Now  the  factors  in  the  cost  of  production  of  advertising  space 
—  newspaper  as  well  as  magazine  space  —  which  directly  affect 
the  quality  of  circulation  are  the  manufacturing  costs  (including 
the  quality  of  print  paper,  ink,  engravings,  etc.),  editorial  costs 
(including  the  salaries  of  staff  men,  the  cost  of  contributed 
articles,  regular  departments  and  features,  telegraph,  telephone 
and  Associated  Press  service),  art  department  costs  (including 
staff  artists,  photographers,  free  lance  artists  under  contract, 
etc.),  and  a  general  "  overhead  '^  cost  (which  embraces  the  per- 
sonality back  of  the  publication,  and  the  expenses  of  manage- 
ment and  direction  of  policy) .  The  factors  which  influence  quality 
indirectly  are  the  costs  of  the  circulation  department  (the  relation 
between  the  income  from  subscriptions  and  the  money  spent  to 
get  them)  and  the  cost  of  extra  services,  such  as  dealer  coopera- 
tion campaigns  and  the  like  conducted  for  the  purpose  of  direct- 
ing the  consumer  to  a  place  where  the  goods  are  on  sale.  All  the 
various  systematic  attempts  to  promote  the  sale  of  advertised 
goods  in  distinction  from  imadvertised  goods  belong  in  the  last 
classification. 

It  may  seem  strange  to  talk  of  the  cost  as  a  measure  of  editorial 
strength  or  personaHty,  but  it  is  the  only  term  I  could  find  which 
would  come  anywhere  near  indicating  what  I  want  to  express  — 
the  effort  the  publisher  is  putting  forth  to  get  and  hold  circulation 
of  a  particular  grade.  Furthermore,  it  is  a  term  which  can  be 
used  reciprocally;  by  the  advertiser  to  judge  quality  and  by  the 
publisher  to  demonstrate  quality.  For  example,  the  publisher 
who  can  show  that  the  cost  of  getting  subscribers  is  substantially 
less  than  the  income  received  from  subscriptions  —  in  other  words 
a  high  net  price  for  subscriptions  —  can  thereby  demonstrate  a 
high  percentage  of  renewals,  while  a  low  net  price  for  subscrip- 
tions indicates  an  effort  to  drag  them  in  "  anyhow."  Publishers 
themselves  are  beginning  to  appreciate  this  fact  and  to  use  it. 
A.  D.  Porter,  publisher  of  The  Housewife,  says  in  a  recent  booklet 
on  circulation:  "  The  publisher  who  accepts  a  very  low  net  price 


3IO 


BUSINESS  STATISTICS 


for  subscriptions  universally  gets  a  very  low  percentage  of  re- 
newals at  the  end  of  the  year,  whereas  the  publisher  who  gets  a 
high  net  price  in  his  subscription  endeavors  almost  universally 
obtains  a  correspondingly  high  percentage  of  renewals." 

The  table  herewith  is  prepared  by  way  of  graphic  illustration 
of  the  kind  of  analysis  I  beUeve  can  be  worked  out.  "  A/'  "  B  " 
and  "  C  "  are  three  publications  which  regularly  carry  the 
advertising  of  household  goods,  clothes  and  foods.  The  figures  in 
the  columns  above  are  grades  which  represent  variations  above 
and  below  the  average  quality  for  publications  in  the  same  class. 
I  have  arbitrarily  chosen  "  50  "  to  represent  that  average  quality 
in  each  of  the  divisions.  By  "  average  quaHty  "  I  mean  that 
quality  of  paper,  illustrations  and  the  rest  which  represents 
ordinary  practice.  In  other  words,  average  quality  is  based  upon 
a  manufacturing  cost  which  cannot  be  lowered  without  cheapen- 
ing the  medium  unless  the  average  is  pulled  up  by  added  cost 
somewhere  else. 


Name 

Print 
Paper 

Illus- 
tra- 
tion 

Art 
Work 

Edit. 
Policy 

Con- 
tribu- 
tions 

Fea- 
tures 

Depts. 

Per- 
son- 
ality 

Price 

Extra 
Ser- 
vice 

Av'g 

Rate 

A 

B 

C 

50 
30 

75 
SO 
25 

50 
50 
15 

80 
20 
15 

70 
80 
40 

80 

75 

85 
50 
40 

33 
60 

5 

95 

.67 

SI 

31 

1/2C 
3/7C 
2/5C 

For  example,  the  ordinary  print  paper  for  standard  magazines 
costs  three  and  a  half  cents  a  pound.  That  may  be  regarded  as 
standard,  and  represented  by  50.  Publications  A  and  B  are  thus 
graded.  Publication  C  is  printed  on  a  cheaper  grade,  and  can  be 
rated  only  at  30. 

When  we  come  to  illustrations,  publisher  A  spends  a  good  deal 
extra  for  timely  illustrations;  runs  more  illustrations  than  are 
absolutely  necessary;  uses  every  new  invention  in  the  way  of 
reproduction,  etc.  Publisher  B  is  quite  up  to  normal  in  that 
respect,  while  publisher  C  gets  along  with  as  few  cuts  as  possible. 

The  column  headed  "Art  Work  "  refers  to  the  quality  of  work 
which  goes  into  cover  designs  and  illustration  of  articles,  etc.  A 
publisher  who  pays  for  the  work  of  artists  of  the  first  rank 


SALES  AND  ADVERTISING  STATISTICS  311 

increases  the  quality  of  his  circulation,  and  should  be  credited 
with  it.  Since  the  personal  taste  of  the  advertiser  is  no  fair  test 
of  artistic  appeal,  the  cost  of  manufacture  is  the  only  safe  guide. 
If  the  publisher  is  paying  too  much  for  art  work  the  chart  will 
show  it  before  we  get  through.  Publishers  A  and  B  are  up  to  the 
average.  C,  as  is  to  be  expected  from  the  preceding  columns,  lags 
a  long  way  behind. 

By  "  Editorial  Policy  ''  I  mean  the  purpose  or  lack  of  purpose 
of  the  publication.  Does  it  stand  for  anything  in  particular,  or 
does  it  swing  with  every  ebb  of  public  fancy  ?  Does  it  "  speak 
out  in  meeting,"  or  does  it  carefully  avoid  the  expression  of  any 
opinion  on  less  than  both  sides  of  a  question  ?  Cost  of  production 
is  the  basis  here,  too,  for  editors  with  a  real  purpose  and  the  ability 
to  carry  it  out  costs  money.  Melville  W.  Stone,  general  manager 
of  the  Associated  Press,  said  at  the  Pulitzer  hearing  that  he  under- 
stood that  W.  R.  Hearst  paid  Arthur  Brisbane  $72,000  a  year. 
Yet  $5,000  would  hire  a  man  who  could  fill  just  as  much  space  as 
Brisbane  does  and  not  hurt  anybody's  feehngs. 

It  is  obvious  that  no  publication  can  get  contributors  of  high 
quality  without  paying  for  them,  and  the  disposition  to  go  after 
contributions  of  authoritative  character  is  the  basis  for  the  ratings 
in  this  column.  "  Contributions  "  are  not  to  be  confused  with 
"  Features  "  or  "  Departments,"  however. 

A  "  Feature,"  according  to  this  chart,  is  a  series  of  discussions 
on  the  same  subject  or  allied  subjects  of  popular  interest,  like 
Mark  Sullivan's  pages  on  Congressional  affairs  in  Collier^s,  or  the 
"  Who's  Who  and  Why  "  of  the  Saturday  Evening  Post.  A 
"  Department  "  is  the  familiar  question-and-answer  bureau,  in 
which  information  is  the  prime  requisite  and  which  neither  owes 
its  influence  to  the  peculiar  literary  personality  of  the  writer  nor 
champions  any  reform,  political,  hygienic  or  moral.  The  moment 
a  department  begins  to  preach  or  develop  a  literary  flavor  it 
becomes  a  feature. 

Now  the  reason  features  and  departments  must  not  be  lumped 
with  contributions  is  because  all  pubHcations  do  not  have  them. 
Undoubtedly  Samuel  G.  Blythe  adds  to  the  value  of  the  Post  as 
an  advertising  medium,  and  ''  Who's  Who  and  Why  "  should 


312  BUSINESS  STATISTICS 

justly  raise  the  Posfs  average;  but  it  should  not  be  allowed  to 
pull  down  the  average  of  Leslie's,  for  example.  Suppose  a  pub- 
lication has  one  very  strong  feature,  and  a  great  lot  of  very  cheap 
contributions,  while  another  publication  has  a  first-class  list  of 
contributors  and  no  features  at  all.  It  is  entirely  fair  to  allow  the 
strong  feature  to  pull  the  average  of  the  first  publication  up,  but 
it  should  not  be  allowed  to  pull  that  of  the  second  publication 
down.  For  it  has  nothing  whatever  to  do  with  the  second  pub- 
lication. Therefore  I  have  listed  features  and  departments 
separately,  and  only  where  they  exist  is  any  entry  made  in  their 
columns. 

"  PersonaHty  "  is  a  difficult  thing  to  define,  yet  it  must  not  be 
left  out  of  the  list.  It  is  what  Mr.  Stone  referred  to  when  he  said 
that  the  value  of  Mr.  Pulitzer's  services  to  the  New  York  World 
would  be  undervalued  at  $100,000  a  year.  It  manifests  itself  in 
the  sort  of  activities  Mr.  Hearst  engages  in  wholly  apart  from  the 
actual  conduct  of  a  newspaper  or  a  magazine.  When  the  Outlook 
engages  Theodore  Roosevelt  it  gets  something  the  value  of  which 
is  not  to  be  measured  by  the  amount  of  space  he  fills  nor  what  he 
says  in  it.  If  you  were  to  buy  the  Louisville  Courier- Journal  you 
would  want  to  deduct  handsomely  from  the  gross  business  to 
account  for  the  loss  to  the  paper  of  Henry  Watterson.  Per- 
sonality is  that  quahty  in  some  person  known  to  be  connected 
with  a  pubKcation  which  causes  the  public  to  have  more  con- 
fidence in  that  publication.  Mr.  Pulitzer  bought  a  decrepit 
newspaper  from  Jay  Gould  and  made  it  one  of  the  best  paying 
propositions  in  New  York  largely  through  personality  —  by  mak- 
ing the  people  understand  that  he  was  fighting  their  battles. 

It  happens  to  be  possible  to  express  the  entries  in  the  next 
column  by  percentages.  The  Post  Office  requires  the  receipt  of 
at  least  50  per  cent  of  the  subscription  price  from  each  subscriber, 
and  fifty  happens  to  be  the  number  of  points  adopted  to  signify 
the  ordinary  average.  So  the  percentage  of  the  net  subscription 
price  received  by  the  publisher  is  a  proper  entry. 

The  heading  "  Extra  Service  "  covers  factors  in  the  building  of 
readers'  confidence  which  are  not  included  under  any  other 
heading.    For  example,  Good  Housekeeping's  dealer  campaign  and 


SALES  AND  ADVERTISING  STATISTICS  313 

guaranteed  goods  departments  would  come  under  this  head,  as 
also  Collie/s  dealer  circulars  and  advertising  of  the  Westfield 
laboratory  tests.  The  Curtis  Publishing  Company's  investiga- 
tions among  dealers  would  belong  here,  as  also  the  dealer  litera- 
ture issued  by  the  Orange- Judd  Company.  But,  as  is  the  case 
with  features  and  departments,  the  lack  of  any  such  activity  on 
the  part  of  a  publisher  should  not  be  allowed  to  pull  his  average 
down.  It  naturally  raises  the  quality  of  Good  Housekeeping's 
circulation  because  it  has  adopted  certain  additional  services  to 
advertisers,  but  it  does  not  lower  the  quality  of  the  circulation  of 
The  Century  because  the  latter  does  not  do  so. 

Hence,  in  computing  the  averages  of  each  of  the  three  publica- 
tions, we  divide  by  the  number  of  columns  in  which  entries  are 
actually  made:  in  the  case  of  Publication  A,  by  9;  in  the  case  of 
PubHcation  B,  by  7,  and  for  Publication  C,  by  8.  In  the  last 
column  we  set  the  rates  per  line  per  thousand,  and  are  able  to 
compare  them  in  relation  to  the  quality  "  Averages  ''  we  have 
worked  out.  We  find  that  if  Publication  A  is  a  good  buy  at  half  a 
cent.  Publication  B  is  not  quite  so  good  at  3/7  of  a  cent,  and 
Publication  C  is  low  value  at  2/5  of  a  cent. 

The  above  is  a  very  brief  outline  of  the  system.  Of  course,  it 
goes  without  saying  that  different  charts  must  be  prepared  for 
standard  magazines,  newspapers,  class  and  trade  papers. 

XXI.   Record  of  Advertising  Results^ 

By  Thomas  P.  Comeford 

Advertising  as  a  modem  method  of  promoting  business  is 
recognized  and  employed  by  the  progressive  merchant  of  today  in 
every  commercial  line.  Yet  when  it  is  appreciated  that  in  all 
advertising,  no  matter  how  well  prepared  or  managed,  there  is 
always  that  element  of  uncertainty  of  results,  and  that  hundreds 
of  merchants  of  today  are  advertising  extensively  on  the  plan  that 
advertising  ends  with  the  preparation  of  copy,  getting  it  into 
print  and  paying  the  monthly  bills  without  question,  when  pre- 

^  System,  July,  1909,  pp.  92-94.  Reprinted  by  permission  of  System.  Illus- 
trations of  forms  are  omitted. 


314  BUSINESS  STATISTICS 

sented  —  it  is  little  wonder  that  many  merchants  cannot  under- 
stand where  the  money  goes. 

I  doubt  if  one  could  find  a  successful  merchant  sending  a  sales- 
man out  to  sell  his  goods  with  an  unlimited  expense  account,  yet 
he  freely  invests  money  in  advertising  and  never  goes  to  the  root 
of  the  question  —  why  it  did  or  did  not  pay.  Beyond  a  doubt, 
he  knows  the  salesman  in  his  employ  who  is  selling  the  most 
goods;  is  it  not  just  as  important  that  he  should  know  what  his 
salesman  on  paper  is  doing  in  the  way  of  results  ? 

He  should  know  the  amount  of  space  used  each  day  in  each 
paper,  its  costs  and  results.  He  should  know  what  papers  reach 
the  class  of  people  he  caters  to  and  the  style  of  advertising  that 
best  appeals  to  that  class.  He  should  know  what  the  advertising 
of  each  department  is  costing  in  proportion  to  the  sales,  what 
percentage  of  gross  sales,  competition,  local  conditions  and  so  on, 
warrant  in  advertising.  This  is  particularly  important  in  a  depart- 
ment store,  as  many  departments  demand  more  advertising  than 
others. 

In  order  to  have  such  information  at  hand,  a  system  of  some 
kind  is  necessary.  From  my  personal  experience,  I  believe  a  card 
system  fully  answering  this  purpose  is  one  I  originally  devised 
for  a  department  store  yet  is  applicable  to  any  sized  store  with 
one  or  one  hundred  departments.  Three  different  cards  5x8 
inches  in  size  are  used  in  keeping  the  records  essential  to  the 
business. 

First  is  kept  a  record  of  each  paper  or  medium  contracted  with 
for  advertising.  This  shows  the  date  the  contract  is  made,  date 
of  expiration,  amount  of  contract,  rate  and  conditions.  One 
card  will  answer  the  purpose  of  an  average-sized  department 
store  for  one  year.  Yet  this  card  need  not  be  confined  to  a 
newspaper.  Various  advertising,  such  as  "  Billboards "  and 
"  Programs,"  may  be  listed  here. 

To  keep  a  record  of  the  advertising  used  in  each  paper  each 
month,  another  card  is  used.  The  day's  advertising  is  accu- 
rately measured  and  entered  daily.  On  this  card  is  designated, 
by  a  letter  assigned  to  each  department,  the  various  departments 
advertised  on  each  day. 


SALES  AND  ADVERTISING  STATISTICS  315 

Upon  receipt  of  a  bill  from  the  paper,  each  day^s  advertising, 
the  total  amount  and  the  cost  for  the  month,  is  easily  checked  up. 
At  the  bottom  of  the  second  form,  we  carry  from  month  to  month 
the  amount  of  space  to  be  used  before  the  contract  expires:  as 
in  May  we  used  1,000  lines,  hence  we  had  a  balance  of  9,000  to 
be  used  before  February  i,  1908,  the  date  the  contract  expires. 

A  separate  record  for  each  department  advertised  is  also  kept. 
For  instance,  the  dress  goods  department,  known  as  Department 
A,  was  advertised  on  a  certain  date.  Thus  the  space  devoted  to 
dress  goods  is  measured  and  charged  to  dress  goods.  When 
advertisements  are  of  similar  size,  it  is  not  necessary  to  measure 
in  detail  those  in  each  paper.  The  advertising  of  each  depart- 
ment is  recorded.  In  case  it  is  desired  to  key  each  advertisement 
for  space  used,  a  record  is  kept  of  that. 

The  space  occupied  by  the  name  plate  of  the  firm,  by  general 
store  news  and  so  on,  is  not  measured  in  each  day's  advertise- 
ments, nor  is  an  individual  record  necessary  to  take  care  of  this 
matter.  It  must  necessarily  equal  the  difference  between  the  cost 
of  the  total  departments  advertising  and  the  total  expense. 
Hence,  when  inventory  is  taken  this  amount  is  easily  ascertained. 

I  find  this  the  best  method  for  handling  the  records,  for  if 
fifteen  to  forty  departments  are  advertised  at  one  time,  it  is 
difficult  to  measure  each  department's  space  accurately  enough 
to  have  the  sum  balance  with  the  over-all  measurement;  the 
difference  is  regulated  in  this  way,  with  considerable  time  saved, 
and  the  result  is  the  same. 

On  the  third  card  is  also  recorded  the  actual  cost  of  each 
advertisement,  the  amount  of  sales,  the  percentage  of  sales  and 
the  exact  amount  that  all  advertising  for  that  department  is 
costing.  One  copy  of  each  advertisement  is  pasted  in  a  large 
scrap  book  and  dated.  It  is  not  necessary  to  keep  a  file  of  each 
paper,  for  if  the  amount  on  the  card  varies  from  the  newspapers' 
record,  back  numbers  are  obtainable  (or  the  files  in  the  newspaper 
office  can  be  consulted  if  necessary). 

A  record  of  cuts  held  or  returned  by  the  papers  may  be  kept  on 
a  paper  slip  pasted  near  that  cut  in  the  scrap  book.  As  cuts  are 
returned,  they  are  carefully  checked  off. 


3  1 6  BUSINESS  ST  A  TISTICS 

In  houses  having  an  advertising  department  a  detailed  report 
of  the  total  expenses  is  given  the  bookkeeping  department 
monthly,  or  annually,  as  desired,  yet  all  records,  details,  checking 
of  bills  and  so  on  should  be  left  to  the  advertising  department  for 
proper  handhng. 

I  believe  this  a  most  practical,  simple  and  effective  system.  A 
small  filing  cabinet  will  hold  1,200  cards,  enough  for  six  years' 
work  in  a  large  department  store,  and  all  desired  information 
concerning  the  advertising  is  accessible  at  any  time. 

XXII.  Testing  Copy  and  Mediums  ^ 

In  a  New  York  mail  order  house  a  certain  letter  asking  for  a 
renewal  of  business  is  a  joke  among  the  advertising  men.  Written 
by  a  minor  clerk  years  ago  when  the  house  was  young,  the  letter 
lacks  form.  It  is  crude  —  almost  clumsy.  The  head  of  the  firm 
has  ordered  it  destroyed  a  score  of  times  and  his  experts  have 
substituted  letters  which  the  office  agrees  are  far  better  than 
"  old  go-and-get-'em."  But  when  tests  are  made  the  ridiculed 
letter  gets  the  business  and  leaves  up-to-date  copy  far  in  the  rear. 

So  with  advertising  copy.  "  If  it  goes,  it  goes."  The  criticism 
of  experts  is  a  good  thing;  but  results  and  not  theories  are 
demanded.  The  average  shows.  The  public  is  the  court  of  last 
resort  in  judging  an  advertisement.  The  court  will  not  be 
influenced  and  will  not  be  flattered.  But  unHke  other  incor- 
ruptible courts,  it  will  indicate  to  the  clever  pleader  its  future 
decision. 

Straws  show  the  way  the  wind  blows  and  tests  tell  how  copy 
wiU  go.  The  shrewd  advertiser  of  today,  before  beginning  a 
campaign,  makes  three  important  tests:  He  has  the  public  pass 
judgment  (i)  on  his  copy,  (2)  on  the  mediums  in  which  the  copy 
is  placed  and  (3)  oh  the  field  in  which  the  mediums  circulate. 
After  copy  is  approved,  it  ought  to  be  put  out  on  trial.  It  should 
be  keyed  and  the  results  carefully  checked. 

A  method  effectively  used  by  some  big  advertisers  is  to  try  copy 
for  a  general  campaign  in  a  metropolitan  daily,  a  small  town  news- 

*  How  to  Write  Advertisements  that  Sell,  pp.  111-128.  Reprinted  by  permission 
of  A.  W.  Shaw  Company.    Illustrations  of  forms  are  omitted. 


SALES  AND  ADVERTISING  STATISTICS  317 

paper,  a  farm,  trade  or  class  publication,  various  standard  maga- 
zines and  a  woman's  journal.  The  copy  is  exchanged  from  pub- 
lication to  publication  and  perhaps  inserted  several  times  in  the 
same  magazine.  By  keeping  count  of  replies  and  sales  it  is  easy 
to  find  which  advertisement  is  consistently  strongest.  Some 
firms  and  agencies  have  kept  records  of  this  sort  for  years.  They 
know  accurately  before  they  start  a  campaign  what  pieces  of 
copy  "  take  ''  and  what  mediums  bring  the  best  returns  on  their 
offer.  The  advertising  manager  also  has  before  him  at  the 
beginning  of  each  test  certain  theoretical  figures  which  indicate 
the  number  of  returns  he  should  receive  from  mediums  and  cir- 
cularizing schemes  with  which  he  has  had  long  experience.  If  his 
best  copy  in  his  best  mediums  falls  below  this  theoretical  stand- 
ard he  knows  that  he  must  locate  "  copy  trouble  "  before  the 
campaign  may  be  staged. 

How  to  Make  Tests  for  the  Pieces  of  Copy  that  Will  Pull  Best 

Testing  copy  marks  the  line  beijtween  the  gambler  and  the 
investor  in  advertising.  Testing  with  sufficient  ingenuity  settles 
all  office  doubts  about  the  worth  and  method  of  any  scheme  of 
publicity.  Not  only  is  the  test  conclusive  as  to  the  pulling  power 
of  alternative  pieces  of  copy;  but  it  frequently  shows  the  adver- 
tiser the  amount  of  space  to  use  to  get  the  best  percentage  of 
returns.  In  Cincinnati  a  test  showed  a  manufacturer  that  a 
certain  single  column  advertisement  secured  him  results  as  good 
as  his  page  copy  in  the  same  mediums.  The  difference  in  cost 
turned  a  losing  venture  into  a  paying  one. 

Trial  heats  will  in  the  average  show  the  winner  of  the  race. 
After  tests  are  made  and  checked,  the  advertisement  which  brings 
the  most  business  is  strengthened  by  inserting  the  selling  points 
developed  by  less  successful  copy  and  the  follow-up  correspond- 
ence. The  advertiser  is  now  ready  for  perhaps  a  final  test  and 
then  the  campaign. 

There  are  advertising  managers  who  would  "  fire  "  a  man  for 
running  one  piece  of  copy  twice,  and  there  are  two-inch  advertise- 
ments that  have  run  unchanged  for  ten  years,  building  fortunes 
of  seven  figures. 


3l8  BUSINESS  STATISTICS 

The  copy  test  is  hardly  less  valuable  in  one  case  than  in  the 
other  —  indeed  it  alone  can  decide  whether  old  or  new  copy  is 
best.  It  assists  no  less  in  perfecting  circular  letters,  booklets  and 
dodgers  than  in  planning  a  "  repeat  "  advertisement  for  $5-a-line 
space. 

After  many  tests  on  an  annual  campaign,  an  implement  man 
in  a  county  seat  town  in  Kansas  perfected  a  seasonable  circular 
letter  that  brought  business  beyond  his  fondest  hopes. 

"  Must  I  go  through  this  thing  again  next  season  to  avoid 
repeating  the  same  letter  to  my  old  customers  ?  "  protested  the 
vehicle  man.  "  Must  I  again  lose  time  during  my  business  har- 
vest ?    Where  is  this  test  idea  going  to  end  ?  " 

He  took  down  his  circular-letter  file  and  compared  the  various 
test  pieces  of  copy.  Soon  he  felt  that  in  two  clever  paragraphs  lay 
the  magic  appeal.    A  single  test  proved  this  true. 

Year  after  year  these  two  paragraphs  of  strong  appeal  mas- 
querade before  the  farmers  of  that  county  under  the  make-up  of 
a  brand  new  personal  letter.  And  newly  worded,  the  tested 
appeal  has  never  grown  stale  or  failed  to  get  the  business. 

Having  built  publicly  approved  copy,  the  general  or  local 
advertiser  must  still  determine  what  territory,  classes  of  mediums 
and  what  individual  periodicals  or  other  distribution  he  will 
adopt.  The  experienced  advertiser  has  a  list  of  publications  with 
low  rates  but  limited  circulations  which  pull  in  constant  ratios  to 
the  national  mediums.  Advertisements  are  placed  in  these 
mediums  during  the  copy  test  and  the  results  are  checked  for 
territory  and  classes  of  circulation  as  well  as  for  copy. 

Testing  an  advertisement  presupposes  a  way  to  identify  the 
returns.  Here  is  the  crux  of  the  difficulty  in  thousands  of  adver- 
tising departments.  Some  of  the  biggest  advertisers  in  the  world 
are  "  going  it  blind  "  on  the  strength  of  good  luck.  Thousands  of 
smaller  advertisers  are  following  their  example.  These  men  have 
been  unable  to  contrive  ways  to  key  their  advertising  for  test; 
but  in  most  lines  ingenuity  and  analytical  ability  will  go  far 
toward  devising  helpful  tests. 


SALES  AND  ADVERTISING  STATISTICS  319 

Standard  and  Novel  Ways  of  Keying  Your  Various  Pieces 
oj  Advertising  Copy 

A  great  Chicago  department  store  frequently  tests  its  advertis- 
ing methods  by  moving  to  an  obscure  corner  of  the  room  the  cloak 
or  gown  which  has  been  given  publicity.  The  casual  shopper 
passes  it  by.  The  customer  who  has  been  attracted  by  the  adver- 
tising asks  where  the  article  is  to  be  found.  Coimt  is  kept  of 
inquiries. 

In  preparing  to  market  a  line  by  a  new  national  campaign  to 
dealers  and  consumers,  one  manufacturer  got  records  for  months 
back,  from  dealers  in  typical  cities  where  the  article  had  been  sold. 
He  then  tested  the  new  copy  in  the  local  newspapers  and  two 
especially  strong  national  mediums  well  represented  in  these 
cities.  The  dealers  cooperated  by  recording  sales.  The  net 
increase  in  business,  when  compared  with  the  advertising  expend- 
itures, showed  such  possibilities  that  the  manufacturer  went  into 
the  campaign  with  confidence. 

Anything  which  unlocks  the  results  of  advertising  is  a  key  to 
the  campaign.  The  ordinary  methods  are  the  coupon  —  of 
various  styles  and  shapes  —  identifying  the  medium  by  the  type, 
also  by  the  paper;  and  the  var3dng  departments,  street  numbers 
or  names  and  initials  included  in  the  addresses.  The  correct 
address  should  never  be  used,  as  it  is  constantly  bringing  mail  not 
due  to  any  advertisement. 

If  this  keying  is  crudely  done,  the  reader  is  annoyed  over  having 
his  scalp  hung  at  an  inquisitive  advertising  man's  belt.  The 
cleverest  key  is  one  which  develops  unavoidably  when  the 
purchaser  asks  for  the  goods. 

Advertising  to  do  a  certain  thing  at  a  certain  time,  such  as 
holding  an  "  hour  sale,"  has  been  found  an  effective  key  for  the 
local  merchant's  advertisement.  A  watch  company  keeps  track 
of  its  advertisements  by  naming  certain  of  its  watches.  In  one 
town  a  certain  piece  of  goods  is  called  a  business  man's  watch;  in 
another  it  is  a  railroad  man's  watch;  in  another  it  is  a  farmer's 
watch.  The  local  stores  handling  the  goods  are  an  effective  key  for 
the  local  merchant's  advertisement.  A  shoe  manufacturing  house. 


320  BUSINESS  STATISTICS 

which  sells  direct  to  the  consumer,  in  one  publication  calls  its 
free  pamphlet  How  to  Make  Your  Feet  Glad;  in  another,  the 
same  book  is  named  Happy  Feet.  A  clothing  manufacturer  uses 
a  style  number  for  his  key.  In  style  345,  the  34  indicates  the 
style  and  the  5  is  the  key  to  the  advertisement. 

World-wide  dealers  in  fountain  pens  and  in  toilet  preparations 
distributed  through  retailers,  acknowledge  inability  to  trace 
actual  sales;  but  successfully  "  meter  "  the  strength  of  copy, 
mediums  and  trade  territories  by  local  demand  as  reported  by 
dealers  and  field  men,  and  by  the  proportionate  number  of 
requests  received  for  various  advertised  booklets,  sample  pack- 
ages and  the  like. 

Where  the  product  represents  a  large  expenditure,  as  in  the 
automobile  field,  sales  should  be  checked  back  to  the  decisive 
copy,  mediums  and  follow-up.  Even  in  the  case  of  smaller 
articles  keen  advertisers  often  go  to  great  lengths  in  correspond- 
ence and  personal  field  work  to  know  exactly  where  business 
originates  and  how  the  advertising  checks  out.  Although  an 
absolute  check  may  not  be  made,  these  long-time  records  of 
comparative  efficiency  are  very  valuable. 

Making  the  Campaign  Measure  Up  to  Test 

That  advertising  test  is  most  instructive  which  has  most  closely 
followed  every  condition  you  will  meet  in  your  actual  campaign. 

A  mail  order  house  which  sells  Panama  hats  became  converted  ^ 
to  the  idea  of  testing  advertisements.  Copy  having  been  tried  in 
various  mediums  with  success,  a  national  campaign  was  inaugu- 
rated but  with  discouraging  results. 

The  hatters  were  ready  to  resume  their  hit-or-miss  style  of 
pubKcity  when  an  advertising  "  doctor  "  pointed  out  their  recent 
error.  The  tests  had  been  conducted  in  the  spring  and  early  sum- 
mer when  the  demand  for  straw  hats  was  keen.  The  campaign 
had  been  run  into  midsummer,  when  most  men  had  secured  the 
article  advertised.  Apparently  the  season  was  too  limited  to 
permit  both  test  and  campaign  in  one  year. 

The  following  year  the  tests  were  begun  early.  Orders  and 
inquiries  were  few  but  indicated  the  relative  strength  of  various 


SALES  AND  ADVERTISING  STATISTICS  3  21 

copy,  sections  and  mediums.  When  the  campaign  was  launched 
in  the  spring  and  early  summer,  the  magazines  which  had  earlier 
done  the  best  work  continued  their  lead  —  and  the  shop  worked 
overtime. 

In  the  long  rim,  tests  on  both  inquiries  and  orders  are  sure  to 
develop  helpful  ratios  to  the  actual  campaign  in  similar  territory 
and  with  similar  or  identical  copy  and  mediums.  Single  tests  or 
records  covering  short  periods,  however,  must  be  considered  in  the 
light  of  varying  conditions. 

How  to  Guard  Against  Features  that  May  Make  an 
Advertising  Test  Deceptive 

Certain  newspapers  will  produce  mail  order  results  on  days  of 
light  store  advertising  far  out  of  proportion  to  other  days  in  the 
week.  Position  of  copy,  whether  well  printed,  the  amount  of 
space,  the  strength  of  competing  advertisements,  must  all  be  con- 
sidered. In  some  businesses  a  record  of  advertising  for  several 
years  proves  that  the  proposition  "  pulls  "  best  in  most  mediums 
when  first  advertised,  and  that  "  the  cost  per  order  advances  as 
the  advertising  is  continued  before  that  same  body  of  readers, 
regardless  of  whether  the  copy  is  changed  or  not."  Continued 
returns  on  some  one-time  propositions  keep  up  best  in  mediums 
which  change  the  mass  of  their  readers  from  season  to  season. 

The  local  merchant  must  investigate  neighborhood  conditions 
and  can  determine  by  test  the  best  time  for  his  advertisement  to 
appear.  The  druggist  who  distributes  his  advertising  at  the  curb 
side  in  the  waiting  buggies  of  his  farmer  prospects  may  not  get 
attention  until  the  Saturday  night  drive  home;  while  the  clever 
merchant,  who  reaches  his  farmers  Friday  with  announcements  of 
his  Saturday  or  "  First  Monday  "  sale,  has  acted  at  the  right 
time.  Rainy  seasons  make  the  farmer  read.  Local  seasons, 
celebrations  and  calamities  make  differences  between  test  and 
campaign.  Every  condition  which  affects  interest  or  buying 
power  marks  on  the  record  of  your  advertisement.  A  sure  way 
to  avoid  disappointment  is  to  test  under  less  favorable  conditions, 
and,  having  found  a  plan  which  will  balance  the  cost  or  clear  a 
profit  here,  to  make  the  most  of  it  at  once. 


322  BUSINESS  STATISTICS 

The  personal  temptation  to  vary  conditions  between  test  and 
campaign  must  be  curbed.  An  enthusiastic  Northwestern  jobber 
secured  a  list  of  ten  thousand  names.  The  advertising  man  urged 
a  test  on  five  hundred  or  a  thousand  names,  but  the  jobber,  in  his 
enthusiasm  over  the  cleverness  of  the  copy,  ordered  the  entire 
campaign  out  under  two  cent  postage. 

Within  fifteen  days,  more  than  one-eighth  of  the  letters  had 
come  back  unclaimed.  The  list  was  stale.  Moreover,  a  serious 
mistake  had  been  made  in  the  booklet  which  went  with  the  letter. 
A  test  would  have  eliminated  both  these  losses. 

In  another  case  the  same  jobber  carefully  tested  out  fifteen 
hundred  high-grade  names  on  fine  stationery  under  two  cent 
postage,  only  to  mail  the  main  campaign  under  the  green  stamp 
at  a  loss.  Comparative  tests  under  one  and  two  cent  postage 
would  have  told  the  story.  Dissimilar  conditions  only  made  the 
test  misleading. 

An  Eastern  manufacturer  recently  launched  a  seasonable  dealer 
campaign  after  making  workmanUke  tests  of  seven  different 
styles  of  copy.  One  set  of  commercial  literature  had  scored  profit- 
able returns  (3!  per  cent)  on  a  very  difficult  sale.  At  once  the  full 
campaign  was  put  out  carrying  these  pieces  of  copy;  but  delay 
in  making  up  the  returns  on  the  tests  had  brought  the  season 
almost  to  an  end  before  the  full  supply  of  literature  came  from 
the  press,  and  the  campaign  proved  a  failure. 

Accuracy  and  dispatch  are  the  essentials  of  campaigning  by 
test. 

Keeping  Reference  Records  and  Specimen  Advertisements 

Center  in  one  responsible  and  efficient  person  the  full  respon- 
sibility for  accurate  records  and  files  of  your  advertising,  its  cost 
and  its  returns. 

An  adroit  business  man,  who  has  built  his  success  upon  advertis- 
ing, charges  a  worse  error  against  his  auditor  for  losing  a  single 
count  in  an  advertising  test,  than  he  might  for  dropping  a  signifi- 
cant cipher  in  the  ledger.  This  man  has  found  that  in  his  business 
a  skillful  test  will  average  within  from  8  to  15  per  cent  of  cam- 
paign profits.    Failure  to  count  an  order,  or  a  few  unidentified 


SALES  AND  ADVERTISING  STATISTICS  323 

inquiries,  might  lead  him  to  discard  winning  copy — the  seed  from 
which  sales  spring. 

One  of  the  chief  assets  of  this  advertiser  is  his  record  of  past 
results.  The  man  who  believes  that  he  can  keep  such  results  in 
his  head,  or  who  glances  through  the  mail,  "  estimates  "  the 
strength  of  various  tests  and  selects  mediums  by  opinion,  is 
deliberately  draining  profits  into  loss. 

Often  an  advertising  man  must  assert  himself  in  the  most 
decided  way  to  estabhsh  and  maintain  a  genuine  testing  and 
record  system  in  the  office  routine.  A  division  advertising 
manager  who  had  worked  out  tested  copy  and  follow-up  litera- 
ture was  called  to  the  New  York  office  recently  to  account  for 
lagging  business.  The  charge  was  that  his  copy  was  bad.  He 
drew  from  his  pocket  a  record  card  and  proved  that  in  three  sepa- 
rate tests  the  copy  had  proved  itself  high-grade.  "  How  about 
returns  now  ?  "  was  the  general  manager's  question.  ^*  That  I 
cannot  say  without  getting  up-to-date  records  from  the  corre- 
sponding department,"  said  the  advertising  man;  "  but  I  have 
seen  a  large  number  of  coupons  and  miscellaneous  inquiries  in  the 
mail  from  day  to  day." 

The  advertising  manager  returned  to  the  branch  office,  went 
into  the  follow-up  division  and  found  that  an  average  of  forty 
inquiries  per  day  on  a  $22.50  proposition  were  being  allowed  to 
grow  stale  for  perfunctory  follow-up  at  three  weeks  intervals, 
through  the  carelessness  of  subordinates  and  poor  stock  keeping 
on  the  follow-up  literature.  The  desk  drawers  in  the  department 
were  crammed  with  uncared  for  work  of  this  sort  because  no 
proper  head  kept  tight  rein  and  demanded  records  every  day. 

In  another  instance  an  advertising  manager  was  working  to 
convince  an  employer  prejudiced  against  his  publicity.  Orders 
and  inquiries  came  in  well  but  envelopes  bearing  the  street  or 
department  "  keys  "  were  often  thrown  into  the  waste  basket  by 
a  careless  letter  opener  and  by  stenographers  to  whom  the  corre- 
spondence had  been  given  before  it  was  properly  checked  up. 
The  advertising  man  was  perpetually  running  a  race  with  the 
colored  porter  to  keep  the  keyed  envelopes  from  the  flames. 
Checking  returns  at  the  cashier's  desk  would  have  eliminated  this 
element  of  doubt  from  the  business. 


324  BUSINESS  STATISTICS 

While  these  are  extreme  examples,  it  is  nevertheless  true  that 
the  machinery  of  tests,  records  and  follow-up  is  the  most  valuable 
and  the  most  abused  machinery  in  many  businesses;  and  that  it 
merits  no  less  care  than  the  actual  disbursement  of  funds. 

The  willingness  to  keep  records  often  is  hampered  by  lack  of 
system.  One  Chicago  man,  finding  that  the  ordinary  scrap  books 
were  not  large  enough  for  his  purpose,  secured  the  largest  size 
loose-leaf  invoice  books.  The  advertisements  were  pasted  on 
manila  sheets  and  kept  until  out  of  date.  Then  they  were  removed 
from  the  covers,  tied  up  and  stored  in  a  confidential  file  in  the 
vault.  To  each  advertisement  is  attached  a  printed  slip  showing 
the  total  sales  and  inquiries  traced  to  the  copy,  the  medium  in 
which  it  appeared  and  the  number  of  times  it  ran.  Another  sheet 
shows  in  detail  the  cost  of  the  advertisement  proportioned  among 
the  various  departments  of  the  store. 

This  plan  of  filing  returns  on  advertisements  with  the  copy  is 
cumbersome.  One  system  which  has  worked  out  with  much  suc- 
cess is  the  result  of  development  during  the  past  four  years.  The 
advertiser  has  written  and  placed  advertisements  of  all  sizes  on  a 
dozen  different  propositions  and  also  circular  letters  and  com- 
mercial literature  on  various  offers.  Every  advertisement  carries 
at  the  bottom  a  number  in  five  point  type.  Every  piece  of  com- 
mercial Kterature  also  carries  a  number;  and  every  circular  letter 
has  at  the  bottom,  following  the  stenographer's  initials,  a  similar 
key.  This  not  merely  identifies  every  proposition,  but  affords  a 
basis  for  filing,  noting  results  upon  and  re-ordering  or  following 
through  every  piece  of  copy  which  the  department  handles. 
Periodical  copy  is  numbered  from  one  up,  in  five  different  groups, 
identified  by  the  letters  A,  B,  C,  D,  E,  as  A25,  B26.  The  letter 
indicates  the  proposition  the  copy  covers.  Specimens  are  filed 
numerically  in  folders,  one  for  each  class  letter.  Three  copies  of 
each  advertisement  are  usually  put  in  so  that  there  are  extra 
copies  at  need.  They  are  not  pasted.  Folder  contents  are  trans- 
ferred from  the  vertical  desk  file  to  the  vault  every  year,  so  that 
the  folders  are  never  cumbersome. 

Circular  letters  and  commercial  literature  on  different  proposi- 
tions are  filed  in  the  same  way  under  subsequent  letters  of  the 


SALES  AND  ADVERTISING  STATISTICS  325 

alphabet.  The  letter  and  number  at  the  top  of  any  record  card 
identifies  the 'advertisement  and  indicates  at  a  glance  what  kind 
it  is  and  on  what  class  of  goods.  In  ordering  a  new  run  of  a 
standard  circular  letter,  or  applying  to  the  stock  room  for  a  supply, 
all  that  is  necessary  is  to  give  the  letter  and  key  number  of  the 
circular  wanted.  This  system  also  facilitates  stock  keeping  and 
the  perpetual  inventory  which  enables  the  advertising  man  to  use 
up  circulars  while  they  possess  selling  value. 

The  cut,  drawing  and  photograph  cabinets  are  arranged  in  the 
same  way  by  letter  and  key  number,  showing  the  relation  of  every 
cut  to  the  advertising  campaign  and  specimen  file. 

How  to  Plan  Your  Next  Campaign  by  Past  Averages 

Advertising  records  properly  kept  are  the  military  maps  of  the 
country  fought  over  last  year  and  again  to  be  the  scene  of  the 
campaign.  They  may  be  used  in  scores  of  ways;  they  indicate 
the  relative  value  of  first  and  third  class  postage,  of  personal 
and  circular  letters,  of  printed  matter  of  different  kinds,  with 
illustrations  of  various  sizes  and  positions,  of  sales  schemes, 
coupons,  and  every  selling  device  put  to  test.  They  show  the 
best  seasons,  and  in  one  instance  prompted  enlarging  an  ordi- 
nary half  page  into  three  full  pages  with  proportional  profit  each 
spring  and  fall. 

What  Records  of  Advertising  Tests  and  Campaigns  Can 
be  Made  to  Show 

Nearly  half  a  million  dollars  was  spent  last  spring  by  a  mail 
order  concern  for  colored  inserts  in  its  catalogues.  This  expenditure 
is  based  chiefly  on  one  season's  experience  with  colored  illustra- 
tions. During  that  season  colored  illustrations  in  connection 
with  revised  and  strengthened  copy  showed  a  good  increase  in 
business  over  the  previous  year. 

Perhaps  it  was  the  colors  that  brought  business  —  perhaps  the 
new  copy;  perhaps  other  and  unconsidered  factors.  It  would 
have  been  easy  to  test  out  in  adjacent  counties  two  circulars 
identical  except  for  the  use  of  colors,  but  no  test  seems  to  have 
been  made.    Another  mail  order  concern  does  not  use  colored 


326  BUSINESS  STATISTICS 

illustrations  to  nearly  so  great  an  extent,  considering  it  better, 
wherever  possible,  to  rely  on  inquiries  for  actual  samples  that  will 
show  texture. 

Opinions  —  but  no  tests.  Progress  for  both  —  through  good 
luck  and  the  great  virgin  field  of  American  purchasers. 

Advertising  success  cannot  be  developed  in  this  way.  Every 
general  advertiser  and  every  local  merchant  owe  it  to  the  business 
to  set  aside  sufl&cient  money  to  keep  a  record  of  advertising 
experiments  and  experiences. 

Having  kept  a  file  of  advertising  specimens  and  a  record  of 
costs,  inquiries,  follow-up  costs,  orders  and  profits,  and  so  keyed 
the  advertising  as  to  distinguish  the  different  pieces  of  copy  and 
different  mediums  as  completely  as  clerical  expense  makes  advis- 
able, the  advertiser  can  turn  to  his  records  and  map  out  the  next 
campaign  with  almost  the  same  certainty  that  he  plans  for  a  new 
building  or  employs  and  trains  help.  Of  the  many  vital  business 
facts  so  developed,  the  following  are  only  a  few: 

"  On  my  proposition  logical  copy  with  well  authenticated  testi- 
monials sells  to  men;  but  a  woman  wants  the  name  of  some  one 
in  her  town  to  whom  she  can  go  for  personal  testimony." 

"  Only  seventeen  mediums  out  of  a  list  of  thirty-seven  maga- 
zines and  newspapers  proved  profitable  for  me.  Newspaper 
inquiries  come  cheaper  but  seem  to  include  more  curiosity  seekers, 
as  the  cost  of  orders  runs  higher." 

This  advertiser  went  to  great  lengths  to  trace  down  every 
inquiry  and  order  to  its  proper  advertisement  and  medium,  even 
where  this  meant  hours  of  work  and  letter  writing  to  credit  an 
advertisement  that  had  appeared  years  before.  Now,  however, 
he  knows  to  a  penny  just  what  inquiries  and  orders  to  date  have 
cost  him  in  every  medium;  and  not  only  what  pieces  of  copy  to 
repeat,  but  what  circular  letters  he  can  send  each  new  prospect, 
in  what  mediums  he  shall  re-order  space,  what  mediums  he  must 
cancel  entirely  and  what  mediums  may  possibly  pay  him  after 
holding  out  his  advertisement  several  months  until  tardy  returns 
catch  up  with  space  cost. 

This  advertiser  insists  that  his  first  advertisements  pay  best 
and  that  thereafter  he  sells  at  gradually  increasing  cost.    So 


SALES  AND  ADVERTISING  STATISTICS  327 

records  will  show  the  relative  value,  to  your  business,  of  news- 
papers, news-stand  circulation,  magazines  that  renew  constantly 
and  magazines  that  constantly  reach  new  readers. 

As  the  new  campaign  is  to  be  opened,  therefore,  study  and 
tabulate  the  results  of  past  campaigns  in  a  way  to  develop  the 
efficiency  of  different  appeals,  different  pieces  of  copy,  different 
styles  of  illustration,  different  sizes,  different  shapes  and  positions, 
blind  versus  signed  advertising  and  any  publicity  question  that 
puzzles  you. 

The  success  of  one  advertising  agency  is  admittedly  based  on 
the  amount  of  evidence  accumulated  as  to  copy,  seasons,  pros- 
pects, fields  and  publications.  This  agency  can  closely  forecast 
what  reception  will  be  accorded  an  advertising  campaign.  The 
proportions  between  mediums  used  for  testing  and  mediums 
used  in  making  the  final  appeal  have  been  so  carefully  worked 
out  that  results  are  not  a  matter  of  conjecture,  but  may  almost  be 
written  ahead. 

Store  advertising  cannot  so  easily  be  put  on  a  ledger  basis,  but 
last  year's  advertising  specimens  and  records  will  suggest  to  the 
storekeeper  what  to  buy  this  year,  what  will  be  the  most  popular 
as  well  as  how  best  to  describe  and  illustrate  it,  what  mediums 
and  sales  schemes  are  most  valuable  and  what  sections  will 
produce  the  most  trade  or  need  the  most  effort. 

A  Southern  department  store  advertiser  has  a  daily  sheet  on 
which  are  tabulated  for  today,  and  for  the  corresponding  week- 
day last  year,  the  sales  income  and  the  advertising  expense  of  each 
store  section.  This  record  enables  him  to  develop  each  department 
as  it  shows  seasonable  chances  of  profit. 

A  clothing  store  has  a  special  ruled  form  which  the  advertising 
manager  keeps  under  the  glass  top  of  his  desk.  This  form  shows 
the  condition  of  stock  and  the  amount  of  business  done  every  day 
for  the  past  year.  There  is  also  room  on  the  form  for  notes  regard- 
ing weather  or  other  unusual  circumstances.  When  planning 
pubHcity,  the  advertisement  writer  looks  over  his  chart.  He  sees, 
for  instance,  that  business  in  the  men's  furnishings  is  not  up  to 
the  standard  maintained  on  the  same  day  of  other  years.  He  calls 
the  department  manager. 


328  BUSINESS  STATISTICS 

Reference  to  the  manager's  detailed  charts  shows  that  a  certain 
style  of  hat  is  not  moving  as  rapidly  as  it  ought.  As  a  result, 
copy  is  concentrated  on  that  line,  prices  are  cut  if  need  be  and  the 
department  is  cleared  of  its  dead  wood  before  the  opportunity 
slips  away.  In  this  manner,  day  by  day  and  year  by  year  the 
business  of  each  department  is  steadied  and  graded  upward  with 
a  minimum  of  false  steps. 

Experience  is  the  final  word  in  advertising.  The  expert  adver- 
tising man  gets  it  —  gets  it  on  paper  —  and  handles  it  with  open 
eyes,  like  a  ledger-sheet,  on  the  basis  only  of  what  his  advertising 
produces. 

XXIII.  How  Keyed  Returns  May  Throw  Light 

ON  Mediums  and  Copy  ^ 

By  Grafton  B.  Perkins 

Mixed  with  brains,  a  keying  system  is  about  the  best  assistant 
any  manager  of  a  national  or  territorial  campaign  can  tie  up  to. 
But  with  the  brains  left  out,  the  same  system  becomes  a  false 
counselor  of  the  worst  kind. 

Nine  times  out  of  ten,  the  last  analysis  shows  that  keyed 
returns,  intelligently  interpreted,  afford  the  most  conclusive  test 
of  the  comparative  values  of  individual  pieces  of  copy  or  of 
individual  mediums. 

There  are  a  few  large,  highly  organized  houses  whose  whole 
system  of  distribution  is  so  closely  held  in  hand  that  results  from 
advertising  can  be  directly  traced.  But  for  the  majority  of  adver- 
tisers, a  complicated  distribution,  part  to  jobbers,  part  to  large 
retailers,  makes  any  test  along  this  line  all  but  hopeless.  Jobbing 
territories  overlap,  purchasing  for  one  field  is  done  in  another  and 
remote  one,  and  the  whole  process  is  so  interwoven  that  it  is 
usually  impossible  to  say  that  because  direct  sales  to  Indianapolis 
are  heavy,  advertising  there  is  paying  well,  or  that  because 
similar  sales  to  Los  Angeles  are  weak,  the  ultimate  consumer 
in  southern  California  is  not  being  properly  reached  by  the 
publicity. 

1  Printers'  Ink^  May  22,  1913,  pp.  3-8.  Reprinted  by  permission  of  Printers' 
Ink, 


SALES  AND  ADVERTISING  STATISTICS  329 

For  example,  in  a  certain  campaign  the  books  showed  an 
astounding  stimulation  of  sales  in  Providence,  far  beyond  any- 
thing which  could  be  expected  to  result  from  the  advertising.  But 
with  the  same  campaign  running  in  Boston,  results  were  unduly 
slow.  Boston  being  by  far  the  larger  jobbing  center  for  that  trade, 
the  obvious  inference  would  be  that  the  campaign  in  Boston  was 
ill-planned.  But  it  developed  that  one  of  the  biggest  Boston 
retailers  did  all  his  buying  from  a  Providence  store,  while  Boston 
was  by  far  his  largest  outlet. 

Again,  the  direct  sales  to  a  big  Ohio  city  stopped  almost  simul- 
taneously with  the  opening  of  the  advertising  campaign  there. 
On  the  surface,  the  campaign  had  proven  disastrous,  but  investi- 
gation showed  that  the  only  jobber  who  had  hitherto  bought 
direct  had  begun  to  buy  in  combination  with  a  jobber  in  a  neigh- 
boring city.  So  the  details  of  an  advertising  campaign  cannot 
always  be  studied  from  the  pages  of  a  ledger. 

But  wherever  any  number  of  direct  inquiries  arise  from  adver- 
tising, or  wherever  the  proposition  can  be  adjusted  so  as  to  intro- 
duce that  factor  into  the  campaign,  an  excellent  guide  to  the 
comparative  pulling  power  of  copy  and  mediums  is  at  hand, 
worthy  of  the  very  closest  study.  The  tests  thus  furnished  are 
not  and,  except  in  the  cases  of  purely  mail-order  advertisements, 
cannot  be  conclusive  in  themselves,  but  they  do  furnish  the  best 
single  clue  that  the  advertising  manager  can  usually  obtain. 

In  my  own  work  I  have  rarely  known  the  number  of  inquiries, 
not  traceable  to  their  sources,  to  exceed  4  or  5  per  cent  of  the 
total  and,  even  without  asking  for  postage  to  be  enclosed,  I  have 
not  found  that  enough  of  the  requests  were  aroused  purely  by 
curiosity  to  affect  seriously  the  accuracy  of  the  tests. 

In  fact,  with  a  sample  or  booklet  offer  placed  at  the  end  of  an 
advertisement,  with  no  special  display  to  draw  attention,  it  seems 
fair  to  assume  that  very  few  will  notice  the  offer  who  have  not 
already  been  interested  enough  in  the  proposition  to  read  through 
the  body  of  the  advertisement. 

That  keyed  returns  are  directly  in  proportion  to  the  selling 
power  of  an  advertisement  would  be  hard  to  prove.  Surely  it 
would  be  equally  hard  to  disprove.    Personally,  I  have  always 


330  BUSINESS  STATISTICS 

felt  that,  between  two  advertisements  in  which  the  sample  olffer 
was  sensibly  the  same  and  equally  prominent,  the  one  which 
produced  the  greatest  number  of  inquiries  was  certainly  the  one 
which  had  attracted  the  more  attention  and  aroused  the  more 
interest,  and  that  its  greater  sales  eJBfect  could  be  assumed 
therefrom. 

This  refers  solely  to  kejdng  used  to  differentiate  between  two 
pieces  of  copy  inserted  in  the  same  list  of  mediums.  Were  the  test 
made  on  insertions  in  one  magazine  or  only  a  few  newspapers  I 
should  place  less  rehance  on  them,  as  too  many  factors,  such  as 
position,  appearance  on  an  unfavorable  day,  etc.,  might  affect  the 
results.  But  with  insertion  in  a  reasonably  large  list,  the  law  of 
averages  comes  into  play  to  permit  an  accurate  comparison. 

Also,  this  does  not  refer  to  keying  to  test  the  comparative 
values  of  two  or  more  different  periodicals. 

Usually  I  key  every  important  advertisement  and  keep  a  close 
daily  record  of  returns  therefrom.  So  far  as  possible,  the  offers 
for  samples,  booklets,  etc.,  in  a  given  series  are  kept  roughly 
uniform,  in  order  that  the  tests  may  be  fair  in  that  respect,  but 
otherwise  the  series  may  vary  very  widely  as  to  size,  style  of 
display,  illustrations,  etc. 

The  cards  bearing  these  daily  records  become  the  very  heart  of 
my  work.  As  each  advertisement  appears  in  its  turn,  just  so 
surely  does  its  record  appear  on  its  card,  and  so  regular  is  the 
curve  of  these  responses  that  by  the  third  or  fourth  day  I  can  tell 
approximately  what  will  be  the  final  ^'  score  "  of  the  advertise- 
ment, and  can  kill  a  poor  advertisement  before  it  has  had  time  to 
appear  a  second  time. 

As  my  principal  list  is  at  present  arranged,  the  returns  will  be 

somewhat  in  the  following  ratio,  the  absolute  figures  varying  with 

the  advertisement: 

First  day 45  responses 

Second  day 84         " 

Third  day 196         " 

Fourth  day 189         " 

Fifth  day 106         « 

After  the  fifth  day  the  returns  decrease  gradually,  with  a  few 
stragglers  daily  for  a  month  or  two  after  a  single  insertion. 


SALES  AND  ADVERTISING  STATISTICS  33 1 

By  watching  this  "  thermometer,"  it  has  often  been  possible  to 
make  each  successive  series  of  a  given  class  of  advertisements 
produce  increasing  returns,  regularly,  exceptiQg  when  radically 
different  copy  has  been  from  time  to  time  introduced  experimen- 
tally, when  the  newcomer,  being  based  upon  no  previous  experi- 
ence, may  be  strong  or  weak.  This  increase  has  become  so  definite 
a  thing  that,  after  six  or  seven  months  of  watchful  development 
of  a  t)^e  of  copy,  the  exact  order  in  which  a  new  series  of  a  dozen 
or  more  advertisements  will  "  score  "  can  be  closely  foretold. 

When  an  advertisement  proves  itself  a  headliner,  I  naturally 
repeat  it  in  the  next  series  or  a  subsequent  one.  Sometimes  (i) 
the  repetition  will  be  absolute,  in  which  little  new  can  be  learned; 
at  other  times  (2)  I  will  change  the  advertisement  in  some  one 
important  detail,  as  of  arrangement  or  illustration,  having  the 
balance  of  the  advertisement  the  same. 

From  the  former  course,  I  have  become  convinced  that  an 
advertisement  repeated  unchanged  within  two  months,  in  the 
same  list  of  papers,  will  never  pull  as  well  the  second  time.  This 
loss  is  not  so  great  as  to  forbid  my  repeating  a  good  puller  within 
that  time,  rather  than  nm  a  dark  horse,  but  it  is  great  enough  to 
make  me  abandon  many  a  moderate  success,  preferring  to  take 
my  chances  with  a  new  candidate.  The  difference  may  be  slight, 
but  it  is  always  there.  Of  three  insertions  of  the  same  advertise- 
ment in  one  week,  the  first  has  pulled  only  a  little  less  than  the 
other  two  combined.  I  do  not  ask  better  argument  for  frequent 
change  of  copy,  provided  that  quality  of  copy  remains  equal. 

When  the  advertisement  is  changed  in  some  one  essential 
detail,  the  most  important  and  conclusive  tests  are  made.  An 
advertisement  ran  in  all  type,  clear,  open  and  legible.  It  pulled 
remarkably  well,  but,  not  satisfied,  I  included  it  in  the  next 
series,  identically  worded,  but  set  in  six-point  solid,  with  its  head- 
ing greatly  reduced,  but  incorporating  a  cut  that  "  told  a  story." 
The  returns  increased  50  per  cent,  although  the  two  advertise- 
ments ran  in  the  same  list  and  occupied  exactly  the  same  space. 
And  the  second  advertisement  was  handicapped  by  the  fact  dis- 
covered above  —  that  an  early  repetition  of  the  copy  brings  less 
results  than  the  first  insertion,  other  things  being  equal. 


332  BUSINESS  STATISTICS 

This  shows  how  the  results  of  one  test  bear  on  those  of  another. 
Had  the  number  of  returns  in  this  last  case  been  close,  I  should 
have  been  led  astray  by  them  had  I  not  the  other  test  to  guide  me. 
The  test  is  also  a  step  in  proving  the  value  of  illustration. 

In  a  campaign  of  a  few  years  ago  we  felt  that  a  very  large  part 
of  the  business  arose  from  advertisements  directed  along  a  certain 
line,  and  this  was  accordingly  played  up  heavily.  The  adoption 
of  free  samples  made  a  keying  system  possible.  Within  two 
months  we  saw  that  the  theorizing  of  years  was  entirely  at  fault; 
that  a  certain  argument  was  of  minor  interest  and  the  space 
devoted  to  it  was  therefore  reduced. 

Conversely,  a  single  experimental  advertisement  on  a  hitherto 
neglected  subject  outpuUed  any  other  advertisement  in  the  series 
two  to  one,  and  since  that  time  that  subject  has  been  given  a 
prominent  position  in  every  series. 

Similarly,  feelers  thrown  out  in  the  shape  of  small  advertise- 
ments—  often  rate-makers  —  have  many  a  time  shown  the 
public's  interest  or  lack  of  interest  in  some  new  line  of  approach. 
If  successful,  this  has  found  a  place  in  future  campaigns. 

I  am  at  present  awaiting  results  from  an  investigation  which 
suggests  the  details  into  which  it  is  possible  to  go.  In  a  recent 
series  I  had  three  advertisements  of  which,  by  merest  chance,  the 
headings  and  the  texts  could  be  interchanged.  Here  was  an  oppor- 
tunity too  good  to  be  missed.  I  shuffled  the  headings  and  texts 
before  putting  the  advertisements  into  the  next  series,  and  expect, 
by  comparing  the  two  sets  of  returns,  soon  to  have  a  good  idea 
whether  the  comparative  strength  of  the  three  advertisements 
depended  largely  on  the  headings  or  on  the  balance  of  the  copy. 

The  importance  of  the  finer  details  of  display  are  equally  well 
tested  by  this  method.  Not  only  can  it  be  quickly  shown  whether 
or  not  illustrations  are  worth  the  space  they  occupy,  but  the  best 
position  for  the  illustration  is  as  readily  determined.  Shall  the 
illustration  be  at  the  top,  with  the  heading  immediately  follow- 
ing, the  text  last  ?  Shall  the  title  come  first,  then  the  text,  with 
the  cut  artistically  balancing  the  whole,  at  the  bottom  ?  Or  is 
some  other  arrangement  preferable?  The  solution  is  worth 
seeking. 


SALES  AND  ADVERTISING  STATISTICS  333 

In  the  comparison  of  various  mediums,  keying  serves  in  good 
stead,  although  the  results  in  this  field  should  be  even  less  mathe- 
matically reckoned.  More  common  sense  must  enter  into  the 
proposition.  In  examining  individual  papers  or  magazines,  it 
would  seldom  be  safe  to  throw  one  out  solely  because  it  did  not 
show  up  well  in  keyed  returns,  any  more  than  to  discard  for 
general  use  a  line  of  copy  that  failed  in  a  certain  paper,  whereas 
one  might  discard  the  same  copy  if  it  failed  in  a  representative 
list.  The  mental  type  of  the  readers  of  a  paper  must  be  taken  into 
consideration.  One  would  hardly  expect  the  habitual  readers  of  a 
three-or-five-cent  financial  daily,  for  instance,  to  write  as  freely 
for  samples  on  a  50-  or  75-cent  proposition  as  would  the  readers  of 
a  popular  one-cent  paper,  simply  because,  taken  as  a  class,  the 
former  are  more  well-to-do  than  the  latter,  on  the  average,  and 
more  likely  to  spend  a  small  sum  outright  rather  than  to  bother 
about  samples. 

But  by  allowing  for  such  fundamental  differences,  and  by  using 
keyed  returns  as  a  link  rather  than  as  a  whole  chain,  much  useful 
evidence  may  be  deduced. 

Not  long  ago  I  tested  two  of  what  might  be  called  the  second 
string  of  New  York  dailies,  comparing  the  returns  with  those 
from  the  first-rank  papers  of  similar  class,  pro  rata,  of  circulation 
and  cost.  The  result  was  a  speedy  confirmation  of  my  previous 
impression  —  that  for  my  particular  proposition  they  were  not 
worth  the  price  asked. 

Copy  which  I  have  "  standardized  '*  by  recording  its  pulling 
power  in  representative  daily  papers  of  unquestioned  value  is  to 
me  exactly  what  "  standard  solutions ''  are  to  the  analytical 
chemist  —  I  use  them  over  and  over  again  to  gauge  the  strength 
of  other  classes  of  mediums,  always  prorating  results  as  to 
circulation  and  rate  per  line.  More  than  once  this  process  has 
shown  the  value  of  classes  of  papers  which  had  previously 
been  overlooked,  and  some  of  which  could  never  have  been 
measured  by  any  test  of  their  direct  effect  on  sales,  because  of 
their  broadcast  circulation. 

Equally,  such  "  standardized  "  advertisements  help  to  point 
the  fiQger  of  suspicion  at  the  weaker  brothers  which  have  crept 
into  the  list. 


334  BUSINESS  STATISTICS 

An  advertising  man  has  been  spending  thousands  of  dollars  in 
one  very  large  class  of  mediums,  unquestionably  going  into  just 
the  territory  where  the  rest  of  the  campaign  was  thought  weak. 
By  every  theory  that  he  or  his  associates  could  deduce,  the 
mediums  should  have  been  ideal  for  his  proposition.  So  strongly 
were  they  intrenched  that  he  had  never  keyed  his  returns  from 
them.  One  month  he  did  so.  Returns  were  so  small  that  he 
discovered  that  each  inquiry  cost  from  eight  to  twenty  times 
as  much  as  from  the  same  advertisements  in  other  tested 
mediums. 

The  blind  follower  of  keyed  inquiries  would  have  dropped  the 
mediums  at  once,  but  this  man  was  not  content  to  do  so.  Other 
large  advertisers,  whose  buying  of  space  was  usually  of  the 
closest,  continued  to  employ  their  columns  freely;  and  after 
using  the  mediums  for  so  long  a  time,  he  hesitated  to  drop  them 
and  lose  the  cumulative  effect  of  his  past  advertising.  But  every 
keyed  advertisement  told  the  same  story. 

Representatives  of  these  mediums  insisted  that  it  was  because 
their  readers  were  "  somehow  "  of  a  different  kind,  men  and 
women  who,  for  some  reason,  did  not  respond  as  freely  as  readers 
of  other  literature.  Examination  of  original  inquiries  failed  to 
disclose  any  marked  difference.  The  writers  appeared  to  be  of  a 
slightly  higher  average  type  than  those  who  responded  from  one 
similar  class  of  mediums,  and  slightly  lower  than  those  who 
responded  from  another.  The  only  explanation  seemed  to  be 
that,  while  the  periodicals  in  question  undoubtedly  had  wide 
circulation,  they  were  not  vital  enough  to  the  individual  sub- 
scriber to  be  closely  read.  His  investigations  seemed  to  prove 
that  practically  every  subscriber  also  took  one  or  more  of  the 
other  mediums  which  he  used. 

This  is  typical  of  the  relations  of  keyed  returns  to  the  deter- 
mination of  mediums.  A  poor  showing  did  not  cause  this  group 
to  be  dropped,  but  it  did  direct  suspicion  towards  it  and  demand 
that  it  prove  its  value. 

Certainly,  mixed  with  brains,  the  keyed  return  is  the  best 
and  quickest  single  test  for  which  the  general  advertiser  can 
hope. 


SALES  AND  ADVERTISING  STATISTICS  335 

XXIV.   Cumulative  Value  and  Advertising  Record 

Keeping  ^ 

By  Wiluam  a.  Shryer 

Any  successful  business,  whether  an  advertised  business  or  not, 
is  the  result  of  growth.  It  is  very  difficult  to  create  a  successful 
business,  as  both  trade  and  profits  appear  to  pile  up  gradually, 
with  the  tendency  constantly  to  increase.  In  practically  every 
unadvertised  business  a  maximum  of  increase  is  attained  in  a 
comparatively  short  time.  In  an  advertised  business  the  limit 
of  profitable  extension  is  usually  commensurate  with  the  skill, 
courage  and  ability  of  the  advertiser.  Some  advertised  businesses 
exhibit  the  maximum  of  profit  quickly,  defying  all  attempts  to 
expand  thereafter.  Such  cases  are  comparatively  rare  among 
those  skillfully  advertised,  although  the  conditions  of  certain  lines 
of  trade  preclude  any  increase  after  a  certain  limit  of  possible 
business  is  reached. 

An  accompaniment  of  advertised  business  is  this  tendency  of 
cumulative  increase.  This  marked  characteristic  of  most  adver- 
tised businesses  has  been  turned  to  immense  profit  by  the  pub- 
lishing interests,  who  long,  long  ago  pounced  on  the  principle  and 
declared  it  the  essential  property  of  the  advertising  medium,  in- 
stead of  a  principle  of  the  business  advertised.  This  pernicious 
doctrine,  so  skillfully  fostered  by  the  space  seller,  has  developed 
for  him  a  superstitious  fetichism  that  is  actually  venerated  as  an 
unshakable  law.  Conceived  in  the  dim  past,  the  doctrine  of 
cumulative  value  is  kept  alive  by  the  seller  of  advertising  through 
the  pure  ignorance  of  the  buyer  of  advertising.  In  discussing  the 
subject  here  let  it  be  thoroughly  understood  that  any  attack  of 
mine  is  not  against  the  principle  of  cumulative  value,  but  against 
its  appropriation  by  the  publisher  who  claims  cumulative  value 
is  an  attribute  of  his  medium,  whereas  it  is  strictly  an  attribute  of 
honest,  satisfactory  business  methods.  Cumulative  value  is  no 
more  the  peculiar  attribute  of  an  advertised  business  than  it  is 
of  an  unadvertised  business.    An  advertised  business,  however, 

1  William  A.  Shryer,  Analytical  Advertising,  pp.  77-96.  Reprinted  by  permis- 
sion of  Business  Service  Corporation. 


33^  BUSINESS  STATISTICS 

has  a  potential  area  manifestly  greater  than  any  unadvertised 
business.  To  secure  real  cumulative  value  the  advertiser  must 
be  infinitely  careful,  honest  and  honorable  in  dealing  with  pur- 
chasers, and  through  such  policies  he  may  expect  a  degree  of 
cumulative  value  that  is  absolutely  beyond  any  possible  return  of 
such  character  for  the  unadvertised  enterprise. 

It  has  never  been  hard  for  the  seller  of  advertising  to  hoodwink 
the  purchaser  of  advertising.  The  proper  appeal  to  our  imagina- 
tion will  always  "  get "  us,  no  matter  how  unlikely  the  slick  argu- 
ment is,  when  viewed  in  the  sane  light  of  reason.  The  psychologi- 
cal explanation  of  this  superstition  relative  to  cumulative  value 
is  easy.  The  sellers  of  advertising  have  always  said  it  was  the 
true  word.  Few  if  any  advertisers  ever  doubted  the  statement 
sufficiently  to  put  it  to  a  true  test.  As  a  result  those  who  failed  to 
succeed  were  content  to  berate  themselves  as  the  "  experts '' 
berated  them,  and  the  failures  were  chalked  up  to  "  wrong  copy," 
or  what  is  more  probable  as  the  experts'  opinion,  "  not  enough 
money  spent."  There  are  plenty  of  other  excuses  that  might  be 
conjectured,  but  these  two  are  sufficiently  prevalent  to  make  a 
catalogue  of  the  others  superfluous. 

The  favorite  platitude  of  the  seller  of  advertising  is  "  constant 
dripping  wears  away  the  biggest  stone."  A  careful  analysis  of  the 
meaning  behind  such  a  platitude  will  convince  most  advertisers 
that  their  chances  for  success  through  such  a  process  are  about  as 
slow  and  sure,  during  the  course  of  an  ordinary  lifetime,  as  the 
practical  geological  result  is  likely  to  be  manifest  in  any  ten 
human  generations.  The  cumulative  value  of  publications  and 
the  wearing  away  of  geologic  formations  are  equally  effective  and 
practical. 

The  concrete  manifestations  of  this  platitude  take  the  following 
forms  as  selling  points: 

Every  advertiser  is  familiar  with  each  of  these  statements: 

1.  The  first  insertion  of  your  advertisement  is  no  practical  test 
of  its  efficiency. 

2.  In  order  to  secure  any  practical  test  for  your  advertisement 
it  must  appear  not  less  than  three  times  in  a  publication. 

3.  By  constant  repetition  of  your  advertisement  in  a  publica- 
tion you  will  at  last  secure  profitable  returns  for  yourself  from  it. 


SALES  AND  ADVERTISING  STATISTICS  337 

4.  You  cannot  secure  profitable  results  by  spasmodic  insertions 
of  an  advertisement  in  any  pubKcation.  If  you  do  not  have  the 
*'  courage  "  to  run  an  advertisement  constantly  and  long  you  will 
fail. 

5.  The  longer  and  more  persistently  you  nm  your  advertise- 
ments in  any  publication  the  more  profitable  it  will  become  for 
you. 

A  self-evident  corollary  is  the  necessary  result  of  such  super- 
stitions. It  is  that  unless  the  advertiser  has  an  unlimited  amount 
of  money  for  experimental  purposes  and  an  unbounded  faith  in 
such  representations  he  will  fail,  unless  some  divine  providence 
endows  him  with  a  degree  of  prescience  that  insures  copy  of 
miraculous  pulling  power. 

On  entering  the  advertising  field  I  was  aware,  in  a  more  or  less 
hazy  fashion,  that  each  of  the  above  five  "  laws  "  were  supposed 
to  have  been  written  by  some  advertising  Moses  and  to  be  the 
more  reverenced  on  account  of  their  Apocryphal  character  than 
might  be  the  case  were  their  authority  vested  in  any  ordinary 
human  of  modern  times.  With  characteristic  agnosticism  I 
asked  to  be  shown,  but  no  facts  nor  figures  were  adducible.  I 
have  yet  to  learn  of  any  scientific  data  in  support  of  the  prevail- 
ing dogma.  I  quickly  commenced  gathering  data  myself,  with  the 
uncontrovertible  result,  the  farther  I  went,  that  each  and  every 
claim  in  support  of  this  common  belief  was,  in  my  particular  case, 
absolutely  erroneous. 

During  my  extreme  infancy  as  an  advertiser  I  exhibited  a 
degree  of  bull-headed  obstinacy  that  was  the  despair  of  many  a 
magazine  special.  Their  cumulative  value  theory  attracted  me 
mightily,  first  because  it  violated  every  principle  of  psychology, 
logic  and  reason  and  nevertheless  appeared  to  be  the  guiding 
principle  of  every  seller  of  space  I  met,  as  well  as  the  accepted 
belief  of  most  advertisers.  Second,  because,  if  true,  it  certainly 
meant  a  great  deal  to  me  as  an  advertiser  and  I  wanted  to  be  sure 
of  it. 

But,  I  had  to  be  shown,  and  no  one  in  over  four  years  had  been 
able  to  do  it.  I  have  listened  to  many  spellbinders,  and  have 
participated  in  many  wind  jammings  and  have  many  the  time 


338  BUSINESS  STATISTICS 

and  oft  asked  for  facts  and  figures  to  support  the  fanciful  oratory 
so  plentifully  employed  in  eulogizing  old  cumulative  value.  No 
facts  —  no  figures  —  just  faith.  Faith  is  a  great  thing,  and  with- 
out it  this  life  would  be  a  desert  waste,  but  in  buying  advertising 
of  the  seller  of  space  I  prefer  faith  in  facts  and  figures  to  faith  in 
ignorance,  especially  as  faith  in  the  seller's  theory  is  purely  at  my 
expense.    He  rarely  if  ever  tries  it,  you  will  notice. 

With  the  firm  conviction  that  the  problem  was  in  reality  one 
easy  of  solution  in  my  particular  case  I  started  out  to  solve  it, 
and  did  so  to  my  own  satisfaction.  I  exhibited  my  results  to  the 
devotees  of  the  dogma.  They  were  considerably  surprised  to 
learn  that  my  records  were  absolutely  open  to  their  inspection, 
and  on  account  of  it  were  much  inclined  at  first  to  entertain  grave 
doubts  as  to  my  sanity.  As  time  went  by  and  the  records  of 
month  to  month  strengthened  in  convincing  material,  doubts  of 
my  personal  sanity  seemed  to  wane,  and  in  its  stead  the  records 
were  dubbed  "  perfectly  extraordinary,  don't  you  know " ; 
^'  most  interesting  and  remarkable,  but  absolutely  unique,  don't 
you  know."  Never  having  had  any  experience  in  advertising  I 
began  to  view  my  proposition  as  the  one  great  exception,  and  for 
a  number  of  months  took  pardonable  pride  in  having  evolved  a 
business  that  presented  manifestations  absolutely  contrary  to 
those  of  any  other  advertiser  since  advertising  was  discovered. 
As  time  passed  I  became  directly  interested  in  the  exploitation  of 
other  propositions  through  advertising,  and  from  time  to  time 
secured  more  or  less  complete  records  of  the  results  of  other 
advertisers.  The  facts  then  began  to  come  out.  My  original 
observations  relative  to  cumulative  value  were  exactly  the  same, 
in  all  essential  particulars,  as  those  that  invariably  manifested 
themselves  wherever  careful  dependable  records  were  kept.  All 
of  my  own  records  will  be  given  later,  as  well  as  a  number  of 
others,  and  they  will  show  that  all  the  prevailing  theories  of 
cimiulative  value  are  absolutely  erroneous,  misleading  and  in 
many  instances  are  absolutely  fanciful. 

By  means  of  accurate  records,  without  which  few  advertisers 
have  any  excuse  for  being,  I  succeeded  in  deducing  the  following 
laws  for  my  own  business: 


SALES  AND  ADVERTISING  STATISTICS  339 

The  first  insertion  of  a  tried  piece  of  copy  in  a  new  medium  will 
pay  better,  in  every  way,  than  a  subsequent  insertion  of  the 
same  copy  in  the  same  magazine. 

The  reappearance  of  the  same  piece  of  copy  in  the  same  maga- 
zine will  pay  less  in  direct  proportion  to  the  number  of  times  it 
runs  consecutively. 

By  inserting  a  certain  piece  of  copy  in  a  certain  magazine  and 
skipping  every  subsequent  issue  until  the  first  (or  any  insertion) 
pays  out  it  is  possible  to  use  certain  publications  that  would 
mean  almost  dead  loss  if  used  consecutively. 

Changing  copy  and  running  consecutively  will  not  prove  any 
more  profitable  than  running  the  same  copy  consecutively,  if  each 
change  is  equally  strong  copy. 

The  first  piece  of  copy  in  any  publication  will,  per  dollar  spent, 
produce  more  business  than  any  piece  of  copy  ever  nm  in  that 
pubHcation. 

The  longer  any  copy  is  run  in  any  publication  the  more  it  costs 
to  run  it  and  the  less  results  it  pulls. 

All  advertising  from  which  these  rules  were  deduced  was  keyed 
according  to  size  of  space.  The  spaces  used  varied  from  four  lines 
classified  to  three  page  readers.  Every  piece  of  copy  of  a  certain 
size,  in  a  certain  medium,  was  keyed  the  same  irrespective  of  the 
number  of  times  it  showed,  or  the  intervals  succeeding  insertions. 
A  piece  of  fifty-six  line  copy  run  in  1909  in  Everybody s  Magazine^ 
for  instance,  was  keyed  29.  It  was  repeated  often,  the  latest 
showing  being  in  July,  191 1,  and  keyed  the  same.  This  style  of 
keying  gives  every  benefit  to  the  magazine,  as  sales  are  just  as 
likely  to  result  one  time  as  another,  as  a  continuous  follow-up  is 
working  on  every  prospect  all  the  time.  All  inquiries  that  come 
in  at  any  one  time  may  be  the  result  of  the  same  advertisement  in 
any  one  of  the  preceding  issues.  This  results  in  giving  any  single 
insertion  a  decidedly  favorable  handicap,  but  in  spite  of  this  every 
rule  outlined  above  has  proved  there  is  no  such  thing  as  cumula- 
tive value  in  any  publication.  Now  and  then  some  isolated  cases 
violate  these  rules,  and  more  inquiries  may  be  secured  on  a  second 
insertion  than  on  the  first.  By  subtracting  those  proportionately 
attributable  to  the  first,  it  would  almost  invariably  prove  the 


340  BUSINESS  STATISTICS 

second  or  later  insertion  poorer  than  the  first.  By  keying  all  the 
same  in  this  fashion,  it  has  also  been  possible  to  maintain  a  fairly 
even  average  of  interest  for  several  months.  Sometimes  an  inter- 
mediate insertion  would  actually  show  better  than  the  first  or 
subsequent  insertions.  Such  cases  usually  proved  some  particular 
feature  responsible  for  such  differences.  Better  position,  some 
especially  interesting  article  in  some  number,  or  one  of  any 
number  of  possible  explanations  would  be  evident.  In  some  cases 
no  explanation  would  be  apparent,  but  one  great  rule  has  never 
been  changed,  and  it  is  a  death  blow  to  any  publication  trying  to 
sell  me  space  on  cumulative  value  theory.  Every  publication 
either  wears  out  for  any  single  proposition,  if  used  consecu- 
tively, or  increases  in  cost  to  a  decidedly  marked  degree,  usually 
prohibitive. 

Varying  in  no  essential  particulars,  every  set  of  records  I  have 
had  any  opportunity  to  examine  have  proved  exactly  the  same 
things  as  mine  have  proved. 

Several  years  ago  a  popular  magazine  conducted  a  subscription 
campaign  which  actually  embraced  the  use  of  magazines  as  well 
as  newspapers.  The  subscription  price  was  $i.oo.  The  size  of 
the  space  varied  somewhat  in  different  mediums,  but  the  table 
of  advertising  costs  will  show  the  approximate  sizes.  The  results 
of  this  campaign  were  given  to  me  with  the  request  that  I  use 
them  with  no  mention  of  the  publication's  name.  The  copy 
pulled  subscriptions  direct. 

The  tabulated  data  of  this  campaign  is  given  below. 

An  analysis  of  these  actual  results  in  securing  magazine  sub- 
scriptions develops  many  interesting  features.  I  will  point  out 
several  that  are  particularly  illuminating  in  reference  to  the 
cumulative  value  superstition. 

The  average  cost  per  subscriber  from  the  entire  campaign  is 
$i.io;  $3,147.94  in  advertising  resulted  in  2855  subscribers  at 
$1.00  each. 

The  average  cost  per  subscriber  from  the  first  insertion  of  these 
advertisements  is  eighty-five  cents.  This  includes  a  count  of  the 
pubhcations  used  only  once.  The  total  amount  spent  in  one  time 
insertions  and  in  the  first  insertions  of  those  used  more  than  once 
was  $1,870.19,  which  resulted  in  2196  subscribers. 


SALES  AND  ADVERTISING  STATISTICS 


341 


Date  run 


Medium 


Cost  of 

No.  of 

ad. 

subs. 

$40.00 

51* 

40.00 

20 

250.00 

338 

250.00 

181 

37.50 

47 

200.00 

234 

30.00 

10 

30.00 

3 

100.00 

136 

45 -oo 

58 

62.50 

35 

50.00 

66 

12.00 

17 

27.00 

13 

90.00 

258 

90.00 

94 

90.00 

57 

90.00 

25 

31-50 

24 

112.50 

131 

112.50 

71 

52.50 

74 

20.00 

6 

60.00 

29 

30.00 

19 

40.00 

13 

15.00 

20 

33.75 

29 

49.00 

62 

112.50 

53 

30.00 

67 

42.50 

9 

15.00 

2 

12.00 

6 

25.00 

18 

15.00 

23 

30.00 

21 

11.00 

21 

24.75 

2 

24.75 

I 

42.00 

39 

20.00 

23 

12.00 

22 

27.00 

3 

Cost  per 
sub. 


March 
April 

February  19 
March  6 
February  12 
February  17 
March 
April 

February  26 
February  19 
March  19 
March 
February  3 
March  3 
February  6 
February  27 
March    6 
March  13 
February  5 
February  6 
March  6 
March 
April 
April 
April 
April 

February  13 
March  6 
February  15 
March  8 
February  27 
March  20 
February  27 
February  27 
February  27 
February  25 
February  27 
February  27 
March  13 
March  27 
February  27 
February  27 
February  27 
March  20 


Technical  World 

Technical  World 

Saturday  Evening  Post .  .  . 
Saturday  Evening  Post  .  . . 

Scientific  American 

Youth's  Companion 

Circle 

Circle 

Collier's  Weekly 

Literary  Digest 

Literary  Digest , 

American  Boy 

Chicago  Journal , 

Chicago  Journal 

Chicago  Examiner 

Chicago  Examiner 

Chicago  Examiner 

Chicago  Examiner 

Chicago  American , 

New  York  American 

New  York  American 

American  Magazine 

Cavalier 

Argosy 

Railroad's  Magazine  .... 

All  Story 

Chicago  Inter  Ocean 

Chicago  Inter  Ocean 

New  York  Journal 

New  York  Journal 

San  Francisco  Examiner .  . 
San  Francisco  Examiner.  . 

Los  Angeles  Times 

Denver  Post 

New  York  World 

Detroit  News 

St.  Louis  Globe-Democrat 

Minneapolis  Journal 

Minneapolis  Journal 

Minneapolis  Journal 

New  York  Herald 

Chicago  Record-Herald .  . 

Philadelphia  Times 

Philadelphia  Times , 


$0.79 

2.00 

.72 

1.38 
.80 

.85 

3.00 

10.00 

.73 

.74 

1.80 

.75 

.71 

2.07 

.35 

•95 
1.60 
3.60 
1.3s 

.85 
1.38 

.74 
3-33 
2.06 
1.63 
3.07 

.75 
1. 16 

.79 
2.12 

.45 
4.71 
7.50 
2.00 
1.40 

.65 
1.43 

.52 
12.37 

24.75 

1.08 

.88 

.55 
9.00 


342 


BUSINESS  STATISTICS 


Date  run 


Medium 


Cost  of 
ad. 

No.  of 
subs. 

$10.00 

16 

22.50 

II 

30.00 

72 

67.50 

.      9 

20.00 

32 

45.00 

7 

20.00 

23 

25.00 

23 

37-50 

16 

56.25 

16 

20.00 

38 

35.00 

26 

18.00 

24 

40.50 

8 

18.00 

19 

20.00 

14 

10.00 

6 

14.00 

16 

58.44 

42 

36.00 

6 

Cost  per 
sub. 


February  27 
March  13 
February  27 
March  20 
February  27 
March  13 
February  23 
February  20 
April 
April 

February  20 
March  13 
February  20 
March  20 
February  19 
February  20 
February  20 
February  20 
March  7 
April 
March  23 


Los  Angeles  Examiner 

Los  Angeles  Examiner 

Chicago  Tribune 

Chicago  Tribune 

Boston  Post 

Boston  Post 

San  Francisco  Weekly 

Philadelphia  Inquirer 

Blue  Book  Magazine 

Popular  Magazine , 

St.  Louis  Post-Despatch 

St.  Louis  Post-Despatch 

Cincinnati  Enquirer 

Cincinnati  Enquirer 

Saturday  Chronicle-Telegraph 
Pittsburgh  Gazette  Times   . . , 

Kansas  City  Star 

Rocky  Mountain  News 

Cleveland  Press 

Hampton's  Magazine 

Christian  Herald , 


$0.62 
2.22 

.41 
7.50 

.63 
6.42 

.90 
1.09 
2.34 
3.51 

.52 
^'73 

•75 
5.05 

.95 

1.43 
1.66 
.87 
1.40 
6.00 


The  average  cost  per  subscriber  on  the  subsequent  insertions  is 
$1.91.  "  Cumulative  value  "  raised  the  cost  from  eighty-five 
cents  to  $1.91. 

The  "  magic  third  "  insertion  was  tried  but  twice.  In  the  first 
case  it  raised  the  average  cost  in  that  medium  from  thirty-five 
cents  to  $3.60, over  ten  times  the  cost.  In  the  second  case  it  raised 
the  average  cost  from  fifty- two  cents  to  $24.75,  an  increase  of  over 
forty-seven  times.  Old  cumulative  value  was  evidently  asleep  at 
the  switch. 

Twenty-one  insertions  in  magazines  yielded  1400  subscribers 
for  $1525.69,  at  an  average  cost  of  $1.08. 

Forty-four  insertions  in  newspapers  at  a  cost  of  $1621.25 
secured  1455  subscribers,  at  an  average  cost  of  $1.11. 

An  increase  in  the  size  of  space  for  second  insertions  failed  to 
develop  even  as  many  subscribers  as  the  first  insertion  with 
smaller  space.  This  is  found  to  be  true  not  only  relatively,  but 
actually,  as  no  second  insertion  of  even  more  than  twice  the  space 


SALES  AND  ADVERTISING  STATISTICS  343 

resulted  in  as  many  subscribers  as  the  first  insertion  of  half  the 
space. 

This  campaign  is  not  quoted  here  because  it  is  imique,  for  its 
results  will  be  found  to  duplicate  themselves  in  subsequent 
records  quoted.  It  is  shown  here  because  of  its  pertinent  reflec- 
tion of  the  principles  I  wish  to  show,  and  because  the  results 
secured  are  those  of  a  magazine  whose  presumed  talking  points  for 
space  embrace  the  exploitation  of  a  theory  it  finds  impossible  to 
sustain  for  itself. 

The  sellers  of  space  are  being  confronted  with  advertisers' 
records  that  are  gradually  reflecting  actual  conditions.  The 
importance  of  complete  scientific  records  is  being  constantly 
recognized  by  the  careful  advertiser.  The  result  has  been  evi- 
dence susceptible  of  little  or  no  doubt  relative  to  most  "  keyed  " 
publicity.  There  is  still  the  great  mass  of  "  untraced  "  returns 
with  most  keyed  campaigns,  which  present  opportunities  for  the 
seller  of  space  to  keep  the  superstitions  alive.  By  eliminating 
this  feature  of  doubt  any  advertiser  will  be  in  a  position  to  con- 
vince himself  absolutely  that  there  is  no  such  thing  as  cumulative 
value  as  applied  to  publications.  This  can  be  done  in  almost  any 
advertising  campaign  which  keys  results.  In  my  own  particular 
case  I  have  been  able  to  reduce  unkeyed  results  to  six- 
hundredths  of  one  per  cent.  I  will  show  how  this  has  been  done 
later.  It  is  on  account  of  this  approximate  accuracy  of  returns 
that  the  records  I  will  show  leave  no  room  for  conjecture.  The 
chance  for  specious  argument  by  the  seller  of  space  depends  on 
the  varying  incompleteness  of  any  advertiser's  records.  The  more 
careless  the  record  keeping  the  greater  chance  for  the  seller  of 
space  to  hoodwink  the  advertiser.  One  man's  guess  in  such  a  case 
is  about  as  good  as  another's.  There  is  no  excuse  for  guessing 
about  results  you  can  prove. 

One  set  of  records  that  will  be  shown  in  their  entirety  will 
indicate  the  result  to  the  advertiser  of  incomplete  record  keeping. 
It  will  show  that  whereas  only  about  2  per  cent  of  inquiries  were 
received  unkeyed,  over  15  per  cent  of  cash  was  not  credited  to 
keys.  This  discrepancy  of  about  13  per  cent  represented  money 
sent  by  inquirers  who  had  keyed  their  initial  inquiries,  but  whose 


344  BUSINESS  STATISTICS 

keyed  cards  could  not  be  found  when  the  money  arrived.  This 
was  due  to  a  burdensome  system  of  record  keeping,  as  well  as  a 
costly  and  inaccurate  one.  This  15  per  cent  represented  almost 
$20,000  in  cash.  Such  a  sum  blinded  the  advertiser  to  the  real 
meaning  of  his  keyed  returns,  and  I  am  convinced  cost  him  not 
less  than  $30,000  in  profits  he  might  have  had. 

Such  gaps  in  accurate  record  keeping  make  it  easy  for  the  seller 
of  space  to  pull  the  wool  over  the  eyes  of  the  advertiser.  It  is  the 
remaining  ragged  edge  being  desperately  clung  to  by  the  seller  of 
space  in  attempting  to  keep  the  superstition  alive  with  the  keyed 
advertiser.  As  more  advertisers  put  in  dependable  record  sys- 
tems the  less  chance  for  the  publisher  to  perpetuate  the  old 
superstition.  He  has  therefore  taken  another  very  clever  stand. 
He  is  now  beginning  to  admit  what  he  is  forced  to  concede.  His 
admission  is  something  as  follows: 

"  Keyed  advertising  is  ^  mail  order  '  copy.  It  is  entirely  dif- 
ferent than  any  other  kind  of  advertising.  The  laws  and  rules 
that  govern  its  profitable  use  do  not  apply  to  any  other  kind  of 
advertising.  You  have  no  right  to  assume  that  the  mental  laws 
governing  sales  through  keyed  advertisements  are  laws  of  general 
appKcability.  If  our  publications  do  not  present  cumulative 
value  for  mail  order  copy  it  is  because  the  latter  is  an  abominable 
freak.  If  your  records  force  an  admission  from  us  that  keyed 
copy  does  not  show  cumulative  value,  we  will  of  course  admit  it. 
But  look  at  the  general  publicity  copy.  It  secures  cumulative 
value  from  us.  It  is  not  keyed  and  nothing  can  be  traced  to  it. 
We  defy  you  to  prove  anything  is  true  about  it  except  what  we 
tell  you  is  true.  You  will  never  be  able  to  prove  us  wrong  about 
general  publicity." 

In  analyzing  the  possible  grounds  for  any  faith  in  cumulative 
value  we  must  therefore  consider  this  clever  stand  of  the  publica- 
tion selling  pages  of  space  on  the  strength  of  it.  Before  doing  so 
it  is  not  sufficient  for  me  simply  to  state  that  there  is  no  cumula- 
tive value  in  my  own  case.  I  must  prove  it  in  order  to  warrant 
any  faith  greater  than  that  I  deplore  as  the  prevailing  superstition 
relative  to  the  other  side  of  the  case. 

In  a  later  chapter  I  will  show  actual  records  proving  the  claims 
made  above.    Some  of  them  will  have  a  direct  bearing  on  what  is 


SALES  AND  ADVERTISING  STATISTICS  345 

supposed  to  happen  in  general  publicity  appeals.  We  will  try  to 
understand  the  latter  to  the  limit  of  the  evidence  and  the  apparent 
facts. 

The  greatest  number  of  records,  in  any  one  business,  to  be 
shown  in  this  book  are  those  of  The  American  Collection  Service. 
It  is  therefore  pertinent  and  desirable  that  I  explain  in  some  detail 
just  what  The  American  Collection  Service  is.  An  understanding 
of  the  proposition  itseK  will  make  the  records  of  its  growth  more 
clear. 

The  American  Collection  Service  is  a  correspondence  school. 
It  teaches  the  collection  business,  exclusively  by  mail.  In  August, 
1907,  I  inserted  a  classified  advertisement  in  System  magazine 
offering  to  teach  the  collection  business  to  anyone  who  desired  to 
learn  it.  The  advertisement  was  inserted  simply  as  an  experiment, 
as  I  had  made  up  my  mind  to  enter  the  advertising  field.  My 
knowledge  of  the  collection  business  was  the  only  thing  I  could 
think  of  that  I  could  possibly  sell.  With  the  exception  of  selling 
a  list  of  Justices  of  the  Peace,  I  had  never  been  engaged  in  selling 
anything.  This  "  list "  was  a  book  entitled  Merchants^  Preferred 
Justices  List,  which  I  tried,  unsuccessfully,  to  sell  through  sales- 
men and  afterwards  "  broke  even  "  on  by  selling  through  the 
"  direct  advertising  "  plan  through  letters  to  credit  men. 

At  the  time  my  first  advertisement  was  published  in  System  I 
had  no  idea  what  interest  it  might  arouse,  or  what  I  should  do  if 
any  interest  was  manifested.  I  simply  wrote  the  advertisement, 
sent  it  to  System,  and  waited.  As  soon  as  the  August  issue  was 
out  I  began  to  secure  inquiries,  and  soon  learned  that  I  was  secur- 
ing them  in  unheard  of  numbers.  I  had  prepared  nothing  to  sell, 
had  no  follow-up  letters  written  and  no  advertising  literature  of 
any  kind  to  mail.  I  immediately  draughted  a  synopsis  of  what  a 
course  on  the  collection  business  should  comprise,  and  ordered 
modest  literature  to  be  printed.  Pending  its  delivery  I  composed 
a  first  letter  and  sent  postal  cards  to  all  inquiries  that  I  was 
swamped  with  requests  for  particulars,  but  would  send  full 
information  "  as  soon  as  our  force  caught  up  with  the  rush.'*  My 
first  letter  with  synopsis  of  the  course  went  out  with  very  modest 
circular  matter  about  the  fifteenth  of  August,  and  the  advertise- 


346  BUSINESS  STATISTICS 

ment  continued  in  the  September  issue  of  System.  On  September 
5  th  I  received  the  first  enrolment  for  the  course.  I  then  started 
to  write  the  course,  and  delivered  it  one  lesson  at  a  time  as  I 
finished  writing  each.  It  was  the  hardest  job  I  ever  undertook 
in  my  life.  During  September  I  enrolled  two  more  students, 
both  long  before  I  had  completed  the  lessons.  The  first  man  who 
enrolled  established  a  collection  business  that  has  grown  and 
flourished  ever  since.  It  is  still  conducted  in  Oklahoma  City  by 
an  associate  of  the  original  student,  and  has  been  continuously 
operated  with  increasing  success  from  the  first  day. 

Nearly  all  who  take  The  American  Collection  Service  course 
join  the  movement  with  the  object  of  starting  a  collection  busi- 
ness and  of  becoming  a  Cooperative  Bureau  member.  This 
Cooperative  Bureau  is  composed  of  all  members  who  comply 
with  the  necessary  requirements  and  become  representatives  of 
the  Bureau.  A  list  of  these  representatives  is  printed  every 
month  in  Business  Service  magazine.  Over  this  list  an  almost 
unbelievable  volume  of  collection  business  passes  every  month. 
Any  man  who  takes  the  course  may  use  the  list,  and  if  he  uses  it 
he  is  entitled  to  a  degree  of  service  on  collections  it  is  impossible 
to  obtain  through  any  other  channel.  A  large  number  of  business 
men  have  taken  the  course,  and  they  also  use  the  list  in  sending 
their  collections  throughout  the  country. 

The  School  has  really  become  a  movement,  and  has  been  suc- 
cessful in  every  sense  of  the  word.  The  course  is  being  constantly 
improved,  and  with  each  improvement  is  usually  increased  in 
price.  Four  increases  have  been  made,  the  price  having  gone 
from  $25.00  cash  for  full  membership  to  $40.00  and  from  $30.00 
in  instalments  to  $50.00. 

During  the  entire  existence  of  The  American  Collection  Service 
I  have  experienced  an  absence  from  complaints  that  rarely  obtains 
in  any  business  conducted  by  correspondence.  The  course  is  sold 
subject  to  absolutely  no  return,  and  no  satisfaction  is  "  guaran- 
teed." Nevertheless  every  one  who  buys  it  appears  to  be  more 
than  satisfied  with  it.  I  have  never  had  anything  but  the  most 
unimportant  complaints,  usually  due  to  misdelivery  by  the 
express  companies,  failure  to  receive  Business  Service  magazine. 


SALES  AND  ADVERTISING  STATISTICS  347 

or  similar  minor  errors.  At  one  time  I  accepted  payments  as 
small  as  $5.00,  and  have  had  complaints  from  several  of  such 
instalment  payers,  possibly  six  in  four  years.  I  always  returned 
their  money  at  once  without  argument.  These  men  usually 
"  kicked  "  because  I  would  not  send  them  the  entire  course  on 
payment  of  $5.00.  These  complaints  have  been  entirely  elim- 
inated, as  we  now  accept  $15.00  as  the  smallest  initial  payment. 
I  have  never  had  even  a  suspicion  of  "  trouble  "  over  a  complaint. 
This  condition  is  explained  by  two  facts.  In  the  first  place  I 
always  manage  to  give  every  student  a  little  more  than  he  has 
contracted  for.  In  the  second  place  he  hears  from  me  every 
month,  no  matter  how  long  ago  he  enrolled.  He  knows  I  am 
interested  in  him  and  his  success,  and  he  knows  why.  Through 
his  success  other  students  are  secured.  Each  and  every  member 
is  interested  in  more  members  and  good  members,  for  every  new 
member  means  another  prospective  client,  through  the  business 
he  may  send  over  the  directory  list.  Our  follow-up  material 
contains  hundreds  of  letters  with  pictures  of  successful  students' 
offices,  all  due  to  our  training.  Any  interested  inquirer  will  receive 
an  answer  from  any  of  them,  and  a  copy  of  that  letter  is  almost 
invariably  sent  to  me  the  day  it  is  written.  This  spirit  of  co- 
operation could  not  obtain  in  an  ordinary  correspondence  school, 
but  tlie  psychological  principles  behind  the  kind  of  treatment 
every  student  or  inquirer  receives  is  the  item  of  interest  for  the 
advertiser.    It  is  costly,  but  it  pays. 

In  developing  The  American  Collection  Service  I  was  handi- 
capped with  very  few  theories  of  selHng,  by  mail  or  otherwise.  I 
had  never  sold  anything.  My  business  had  never  been  selling, 
and  I  admitted  an  ignorance  of  it.  I  therefore  set  out  to  learn 
how  to  sell,  with  the  distinct  purpose  of  reducing  my  results  to 
principles.  To  do  this  I  determined  to  be  bound  by  what  accu- 
rate records  would  prove,  and  take  no  one's  word  for  anything 
that  could  be  proved.  It  was  largely  from  the  records  of  The 
American  Collection  Service  that  I  deduced  the  principles  on 
which  all  advertising  done  by  me  is  based,  as  I  have  found  the 
principles  are  largely  as  adaptable  to  one  business  as  another, 
although  matters  of  detail  will  vary  in  every  advertised  business. 


348  BUSINESS  STATISTICS 

That  the  records  to  follow  may  be  made  as  intelligible  as  pos- 
sible a  short  outline  of  the  system  employed  will  be  given. 

The  system  of  advertising  record  keeping  now  in  use  is  a  refine- 
ment of  the  collection  record  system  employed  by  me  in  the  col- 
lection business  for  some  ten  years,  which  was  originally  based  on 
the  alphabetical  system  of  the  Bradstreet  Co.,  and  the  R.  G.  Dun 
and  Co.,  systems,  both  of  which  were  familiar  to  me  through  a 
mercantile  agency  experience  secured  while  in  the  employ  of  each. 

The  system  consists  in  a  card  index  that  gives  the  name  and 
address  of  the  inquirer,  as  well  as  the  key  of  the  advertisement 
which  prompted  his  inquiry,  and  a  working  wrapper  that  contains 
a  perfect  record  of  all  material  sent  him,  which  includes  copies  of 
all  special  letters  as  well  as  all  original  letters  from  him.  This 
system  entirely  does  away  with  letter  filing. 

Every  inquiry  received  is  recorded  and  the  first  letter  sent  the 
day  the  inquiry  is  received.  Every  new  inquirer  receives  a  regular 
series  of  follow-up  letters.  The  number  of  regular  letters  in  this 
series  varies  from  four  to  six.  After  the  regular  series  of  follow-up 
letters  is  sent  the  working  wrapper  goes  in  a  special  file.  Tests  are 
made  constantly  on  these  files.  A  letter  is  tried  almost  every 
month  on  three  thousand.  If  the  returns  are  profitable  on  three 
thousand  the  same  letter  is  sent  to  the  entire  list,  which  numbers 
about  50,000.  A  complete  record  of  the  number  of  letters  sent 
out  on  the  regular  follow-up  will  appear  later.  The  same  record 
will  also  show  the  number  of  special  "  letters  "  sent  out.  The 
latter  will  show  how  many  have  been  tried,  and  how  many  have 
been  successful.  An  inquiry  once  received  is  sent  the  regular 
follow-up  and  in  addition  receives  about  three  special  letters  a 
year.  The  inquiries  received  from  our  first  advertisement  are 
receiving  letters  today.  Good  inquiries  keep  yielding  returns 
every  few  months,  no  matter  how  old  the  original  inquiries.  This 
serves  to  give  the  highest  credit  possible  to  every  advertisement. 
I  know  of  no  business  besides  The  American  Collection  Service 
that  never  ceases  writing  inquirers  and  who  gives  credit  to  the 
advertisement  that  secured  them,  indefinitely. 

Every  advertisement  of  a  certain  size  is  given  a  certain  key  for 
each  publication.    Our  second  advertisement  in  System  magazine 


SALES  AND  ADVERTISING  STATISTICS  349 

was  a  classified  advertisement  keyed  16  State  Street.  Every  sub- 
sequent insertion  of  the  same  advertisement  in  System,  and  even 
those  with  a  slight  change  in  wording,  have  been  keyed  16  State 
Street  ever  since.  Our  first  quarter  page  advertisement  in  System 
was  keyed  15  State  Street.  Unless  some  subsequent  quarter  page 
advertisement  in  System  was  of  a  distinct  character  deserving  an 
especial  key,  all  quarter  page  copy  in  System  was  keyed  15  State 
Street.  Our  original  half  page  copy  in  System  was  keyed  39  State 
Street,  and  has  been  nm  under  the  same  key  repeatedly  since,  the 
latest  being  in  191 1.  The  same  system  of  keying  is  followed  in 
every  publication  used.  It  is  clear  that  were  there  such  a  thing  as 
cumulative  value  in  any  publication  nothing  would  show  it 
quicker  than  a  system  that  gives  to  a  piece  of  copy  nm  in  Septem- 
ber, 1 91 1,  credit  for  all  inquiries  received  that  month  and  there- 
after, as  well  as  every  inquiry  that  might  come  in  from  the  same 
piece  of  copy  that  had  nm  possibly  forty-eight  times  before  under 
the  same  key.  Every  dollar  received  in  September,  191 1,  from 
that  key,  would  also  reflect  the  same  condition.  This  system 
gives  the  publication  the  benefit  of  every  doubt,  and  follows  up  for 
it  every  inquiry  as  long  as  the  address  is  correct.  In  spite  of  these 
conditions  favorable  to  the  magazines  the  results  will  show  what 
little  basis  there  is  for  considering  any  publication  possessed  of  an 
ability  to  deliver  cumulative  results. 

Some  inquiries  will  always  come  to  an  advertiser  bearing  no  key. 
It  is  usually  this  class  of  inquiries  that  gives  the  seller  of  space  an 
advantage  over  the  acjvertiser,  as  one  guess  about  them  is  as  good 
as  another.  (You  can  gamble  on  what  the  seller's  guess  will  be.) 
It  is  impossible  and  impractical  to  attempt  learning  keys  for  such 
inquiries  as  long  as  they  fail  to  produce  returns.  We  have  devised 
a  system  of  learning  the  keys  on  such  of  these  that  buy,  however. 
For  four  years  we  have  succeeded  in  crediting  the  proper  pub- 
lications with  every  dollar  received  except  in  the  proportions 
below: 

1907, None 

1908 006  % 

1909 0094% 

1910 0091  % 

1911 0125% 


350  BUSINESS  STATISTICS 

The  small  amounts  thus  remaining  uncredited  represent  such 
an  inconsiderable  total  as  to  be  negligible.  Of  all  the  enrolments 
secured  I  do  not  think  more  than  three  were  from  men  of  whom 
we  had  no  previous  record.  No  money  can  be  entered  on  our 
records  until  the  proper  clerk  finds  the  card  and  wrapper.  About 
once  a  month  some  enrolment  is  received  for  which  the  records 
cannot  be  found  immediately.  These  exceptional  cases  are 
usually  connected  with  their  proper  records  in  about  two  hours, 
although  about  five  in  four  years  have  taken  about  forty-eight 
hours  to  turn  up.  The  task  of  making  it  easy  to  connect  every 
enrolment  with  the  proper  records  is  the  one  rule  no  employee 
dares  to  violate.    We  therefore  have  no  trouble  over  them. 

One  interesting  case  is  worthy  of  recording.  In  February,  1909, 
we  received  an  enrolment  from  Delhi,  India.  The  money  order 
was  pinned  to  a  reprint  of  a  three-page  advertisement  from 
System,  which  we  had  used  several  months  previously  in  our 
regular  follow-up.  We  knew  some  pubHcation  was  responsible 
for  the  enrolment,  and  we  had  no  previous  record  of  the  remitter 
of  the  order.  We  wrote  for  information  relative  to  the  magazine, 
in  which  our  advertisement  had  been  seen,  and  secured  an  answer 
that  no  magazine  at  all  had  been  seen  containing  the  advertise- 
ment. Information  was  given  to  the  effect  that  reixiitter  had 
happened  to  inspect  a  house  just  vacated  and  that  therein  he  had 
found  our  reprint  of  the  three-page  reader,  which  included  the 
terms  of  our  course.  Thinking  this  information  was  all  we  desired 
to  know,  nothing  further  was  furnished,  until  we  wrote  a  second 
time  and  requested  the  name  of  the  man  who  had  occupied  the 
house.  This  our  student  sent,  and  the  name  of  that  man  was  on 
our  records  as  having  answered  an  advertisement  from  key  65 
State  Street,  which  was  Harper^ s  Weekly.  We  then  gave  credit 
to  the  publication  about  five  months  after  the  money  had  been 
secured,  and  reduced  the  record  of  our  unkeyed  cash  $25.00. 

I  quote  this  case,  as  it  is  more  or  less  interesting  in  itself  and  also 
for  the  purpose  of  demonstrating  to  what  lengths  we  go  to  secure 
the  proper  information,  that  every  publication  may  be  credited 
with  every  dollar  it  could  possibly  have  been  the  means  of  securing 
for  us,  either  directly  or  indirectly. 


SALES  AND  ADVERTISING  STATISTICS  35 1 

Our  advertising  record  consists  of  a  book  with  sufficient  pages 
to  afford  a  double  page  for  every  key  ever  used  and  runs  from 
3  State  Street  to  the  highest  number  on  State  Street  used  by  us. 
The  record  for  191 1  at  this  writing  shows  a  total  number  of  keys 
of  487.  Many  of  the  keys  used  represent  advertisements  run  in 
1907  and  1908,  which  were  never  repeated,  but  to  which  are 
credited  every  dollar  resulting  from  them  day  to  day.  As  a  gen- 
eral follow-up  goes  to  every  inquiry  at  least  three  times  a  year, 
money  is  constantly  secured  from  the  oldest  inquirers,  and  proper 
credit  given.    . 

Our  record  of  each  publication  shows  the  entry  of  every  inquiry 
received  every  day,  every  dollar  secured  each  day,  also  the  date 
and  amount  paid  for  the  advertisement.  The  advertisement 
itself  is  pasted  on  the  proper  page  and  the  totals  of  previous  years 
shown  in  the  margin.  A  cost  system  has  been  devised  that  deter- 
mines at  the  end  of  each  year  just  how  much  it  has  cost  to  follow 
up  every  inquiry  of  that  year.  This  cost  is  our  entire  cost  of* 
business  for  that  year,  and  represents  the  difference  in  total 
receipts  less  cash  profits  and  inventory.  This  net  sum  is  divided 
by  the  actual  number  of  inquiries  received  during  the  year  which 
gives  the  average  cost  of  following  every  inquiry.  Advertising, 
being  charged  directly  to  each  medium,  is  of  course  deducted. 
This  inquiry  cost  is  used  as  the  basis  for  the  ensuing  year,  at 
the  end  of  which  the  entire  record  is  corrected  by  the  actual 
cost.  The  difference  in  actual  cost  and  estimated  cost  rarely 
varies  to  any  great  extent.  It  has  appeared  both  safe  and 
liberal  to  use  the  cost  of  an  ended  year  as  the  basis  for  the 
ensuing  year. 

Our  advertising  record  shows  at  the  end  of  each  month,  for  each 
key,  the  following  information:  Number  of  inquiries  received. 
Amount  of  money  secured.  Amount  spent  in  advertising  that 
month  on  each  key.  To  the  amount  of  advertising  is  added  the 
cost  to  follow  up  each  inquiry  and  this  sum  represents  the  total 
cost  for  the  month.  This  sum  subtracted  from  the  total  cash 
secured  each  month  gives  the  net  profit  for  that  month  on  that 
key.  If  the  sum  taken  in  shows  a  less  amount  than  the  total  cost 
the  result  shows  the  net  loss  for  the  month.    The  totals  for  each 


352  BUSINESS  STATISTICS 

month  are  carried  forward  and  the  total  loss  or  total  profit  show 
for  the  entire  period  at  the  end  of  each  month. 

To  make  it  easy  to  see  just  what  any  publication  has  done  we 
transfer  the  totals  every  month  to  cards  alphabetically  arranged 
as  to  publications,  one  card  for  each  publication.  These  cards 
show  a  record  of  results  for  every  key  used  in  any  publication. 
All  ordering  is  done  from  the  cards. 

The  system  of  charging  each  inquiry  with  a  certain  amount  is 
a  system  overlooked  by  all  but  a  very  few  advertisers.  A  cost 
system  is  operated  by  practically  every  advertiser  with  the  slight- 
est business  training,  but  the  operation  of  these  various  systems, 
for  the  most  part,  is  confined  to  actual  sales.  It  is  evident  to  any 
one  that  every  inquiry  received  costs  something  to  answer.  The 
cost  system  above  outlined  charges  every  inquiry  received  with 
the  average  sum  of  doing  business,  which  is  the  only  fair  basis  for 
a  business  dependent  entirely  on  the  follow-up  of  inquiries.  So 
few  realize  that  inquiries  are  a  liability  that  charging  a  publica- 
tion with  them  rarely  occurs  to  the  advertiser,  yet  a  definite, 
exact  provision  must  be  made  for  this  expense,  if  dependable 
records  are  to  be  relied  on  for  the  success  of  an  advertising 
campaign.  One  advertiser,  whose  complete  records  will  be 
shown,  made  the  great  mistake  of  simply  subtracting  from  the 
cash  returns  of  any  advertisement  the  amoimt  spent  for  the 
advertisement  itself.  As  a  result  he  continued  to  nm  advertise- 
ments in  a  large  number  of  publications  because  he  saw  from  his 
records  that  he  was  continually  taking  in  a  little  more  money 
than  the  advertisements  cost  him,  and  he  thus  ^'  guessed  "  they 
were  yielding  a  profit.  As  he  had  failed  to  charge  anything 
against  every  inquiry  secured  he  had  been  running  a  large  number 
of  showings  that  proved  to  be  almost  dead  losses  to  him  from  one 
year's  end  to  the  other.  Any  advertiser  who  fails  to  run  a  cost 
system  against  his  inquiries  is  likely  to  waste  a  great  deal  of 
money,  as  some  pubHcations  will  pull  inquiries  to  a  remark- 
able degree,  and  even  return  more  money  than  the  adver- 
tisements themselves  cost,  and  still  lose  a  great  deal  for  the 
advertiser,  in  following  up  a  large  number  of  unproductive 
inquiries  constantly. 


SALES  AXD  ADVERTISIXG  STATISTICS  353 

XX\'.  !M\xiNG  Each  Medium  Pull  Its  Shake  of 

THE  Load  ^ 

By  John  P.  Wilder 

How  many  advertisers,  I  wonder,  are  reasonably  certain  that  the 
expenditure  for  space  and  copy  is  pulling  its  fair  share  of  the  sales 
load  ?  How  many  can  produce  the  figures  to  show  that  a  certain 
combination  of  mediums  is  productive  of  better  results  than  a 
certain  other  combination,  differing  from  the  first  perhaps  in  only 
one  or  two  publications  ?  Of  course,  in  the  case  of  a  purely  mail- 
order business  it  is  easy  to  figure  a  publication's  productivity  on 
the  basis  of  cost  per  inquiiy-  and  percentage  of  sales.  But  when 
the  goods  are  handled  by  local  dealers  it  is  a  more  difficult  matter 
to  tell  whether  this  publication  or  that  is  more  influential  in 
turning  over  actual  sales. 

Naturally  enough,  when  the  business  amounts  to  several 
millions  a  year  and  the  appropriation  is  up  well  beyond  the  six- 
figure  mark,  a  little  difference  in  pulling  power  between  two 
general  publicit\'  mediums  doesn't  cut  much  figure.  If  the  rate 
of  increase  of  the  gross  sales  keeps  up,  everj^body  is  satisfied, 
including  the  board  of  directors,  and  it  isn't  necessary  to  be  sure 
that  every  dollar  works  with  maximum  efficiency.  But  when  the 
proposition  is  yet  small,  and  while  the  boss  is  inclined  to  feel  that 
the  first  place  to  retrench  is  in  the  advertising  appropriation,  the 
pulling  power  of  one  publication  over  another  becomes  a  matter 
of  immediate  importance. 

I  have  heard  it  said  over  and  over  again  that  you  can't  measure 
the  pulling  power  of  a  publication  when  the  goods  are  sold  through 
jobbers  and  dealers.  It  is  a  common  sajdng  that  general  publicity 
has  to  be  taken  on  faith — if  the  sales  increase,  it  is  good  advertis- 
ing, and  if  they  don't  it  isn't.  Maybe  so,  yet  I  know  of  one  con- 
cern in  New  York  City  —  the  John  Sinmions  Company  —  which 
is  making  an  attempt  to  approximate  the  relative  values  of  a 
rather  long  list  of  mediums,  while  the  goods  are  going  through  the 
jobber  and  dealer. 

*  PrinUrs*  Inky  March  20,  1913,  K>.  26-28.  Rq)rmted  by  pennission  of 
Printers'  Ink. 


354  BUSINESS  STATISTICS 

This  concern,  in  addition  to  an  extensive  line  of  general  hard- 
ware, distributes  the  Baldwin  lamp,  which  is  a  very  simple 
arrangement  for  generating  and  burning  acetylene  gas.  For 
several  years  the  company  sold  this  lamp  to  miners,  as  a  substitute 
for  oil  lamps,  and  it  became  a  sort  of  standard  article  handled  by 
mine  supply  dealers.  Since  it  was  a  staple  and  since  each  dealer 
had  from  two  to  twelve  hundred  customers  more  or  less  con- 
stantly in  the  market  for  it,  the  retail  price  was  set  at  a  dollar,  of 
which  twenty-five  cents  was  profit  to  the  dealer,  to  whom  the 
goods  were  sold  direct. 

Later  on,  however,  it  was  found  that  there  was  a  certain  demand 
for  a  portable  lamp  for  use  out  of  doors  —  by  hunters,  campers, 
trappers,  and  as  a  substitute  for  the  old  oil  lantern  used  by 
farmers.  The  moment  the  company  tried  to  enter  this  field, 
however,  it  found  that  the  25  per  cent  of  profit  was  low  and 
that  dealers  did  not  take  kindly  to  the  proposition.  When  sold 
as  a  staple  the  price  was  all  right,  but  the  moment  a  dealer  was 
asked  to  handle  the  lamp  as  a  specialty  he  demanded  a  wider 
margin. 

Of  course,  it  was  not  possible  to  reduce  the  wholesale  price  to 
one  class  of  dealers  without  lowering  it  to  all  classes,  and  it  was 
equally  impossible  to  put  over  a  raise  in  the  retail  price.  It  didn't 
look  like  a  very  promising  field,  and  the  company  inaugurated  the 
campaign  of  advertising  the  lamps  for  outdoor  use  with  a  good 
many  misgivings.  A  good-sized  list  of  mediums  was  chosen  — 
outdoor  publications,  weekHes  and  hardware  trade  papers  —  but 
very  small  space  was  used,  mostly  from  one  inch  to  thirty-five 
lines. 

The  copy  went  directly  after  inquiries.  As  fast  as  they  were 
received  letters  were  sent  to  local  dealers  telHng  them  of  the 
inquiries  and  offering  to  fill  orders  for  single  lamps  at  the  whole- 
sale price.  At  the  same  time  the  customers  were  directed  to 
inquire  of  these  particular  dealers.  Gradually  in  this  way  dealers 
were  encouraged  to  stock  the  lamps. 

After  a  year  the  jobbers  began  to  inquire  after  the  line,  and  it 
was  finally  thrown  open  to  them,  the  company  still  continuing  to 
sell  direct  in  response  to  inquiries  which  the  copy  still  requests. 


SALES  AND  ADVERTISING  STATISTICS  355 

When  the  campaign  was  inaugurated  the  company  said  it  would 
be  satisfied  if  5,000  lamps  were  sold  the  first  year  in  addition  to 
the  mine  business.  That  first  year  the  sales  amounted  to  11,000 
lamps,  and  last  year  more  than  50,000  were  sold  for  outdoor  use. 
The  company  is  just  beginning  to  go  after  the  farm  trade,  after 
three  years  of  consistent  emphasis  of  the  advantages  of  the  lamps 
for  use  by  sportsmen  and  campers. 

From  the  foregoing  it  is  easy  to  see  that  it  was  highly  important 
to  the  company  to  know  the  relative  pulling  power  of  the  pubUca- 
tions  used,  where  that  power  was  strongest  and  where  weakest. 
Particularly  after  some  sales  began  to  be  made  through  dealers 
without  any  direct  inquiries,  it  became  necessary  to  check  returns 
on  a  basis  of  something  besides  cost  per  inquiry.  No  money  could 
be  wasted,  because  the  lamp  business  was  only  a  small  part  of  a 
large  concern,  and  if  it  didn't  show  a  profit  the  advertising  would 
be  cut  down,  if  not  stopped  entirely.  Hence  a  publication  which 
wasn't  pulling  inquiries  couldn't  be  cut  off  the  list  just  on  that 
account,  because  it  might  be  sending  customers  to  the  dealers; 
and,  on  the  other  hand,  the  company  couldn't  afford  to  keep  it  on 
the  supposition  that  perhaps  it  was  influencing  dealer  sales.  In 
other  words,  inquiries  from  Collier^s  might  cost  two  dollars 
apiece,  as  against  forty  cents  from  Field  and  Stream,  and  it 
wouldn't  necessarily  indicate  that  the  former  should  be  dropped, 
even  if  they  were  all  turned  into  direct  sales. 

The  following  method  has  been  adopted  of  judging  the  relative 
values  of  the  mediums  used.  As  to  whether  it  is  thoroughly 
reliable  in  all  cases  or  not  there  is,  of  course,  plenty  of  room 
for  argument.  Probably  the  publisher  who  finds  himself  left 
off  will  argue  that  it  is  not  fair,  and  he  who  is  retained  will 
swear  by  the  system.  At  any  rate,  it  can't  be  any  worse  than 
the  pure  guesswork  which  is  relied  upon  more  often  than  it 
ought  to  be. 

When  an  inquiry  is  received  it  is  credited  to  the  publication, 
whose  key  number  is  used,  in  the  regular  way.  A  chart  of  in- 
quiries is  made  by  months,  so  as  to  indicate  any  seasonable 
appeal,  and  at  the  end  of  the  year  a  recapitulation  is  made,  show- 
ing the  cost  per  inquiry  and  the  cost  per  sale. 


3S6  BUSINESS  STATISTICS 

A  ruled  sheet  has  the  key  numbers  down  the  left-hand  side,  and 
the  names  of  the  various  states  across  the  top.  On  this  sheet 
are  entered  the  number  of  inquiries  received  from  each  publica- 
tion from  each  state  during  the  year. 

On  a  third  sheet  the  names  of  the  states  are  set  down  in  order, 
together  with  the  total  number  of  inquiries  received  from  each 
during  the  year.  In  a  second  column  is  placed  the  total  number  of 
lamps  sold  direct  to  dealers  in  each  state  during  the  year. 

The  way  the  system  works  is  this:  Suppose  that  from  Missouri 
it  is  noticed  that  the  total  number  of  inquiries  was  seventy-nine 
and  the  dealer  sales  1,500.  That  indicates  that  the  publications 
which  are  strong  in  Missouri  are  sending  more  customers  to 
dealers  than  are  inquiring  direct.  By  running  down  the  column 
headed  "  Missouri  "  on  the  sheet  giving  totals  by  states,  it  is  easy 
to  tell  which  publications  are  strongest  in  that  state. 

In  Nebraska,  let  us  say,  the  dealer  sales  are  'way  below  the 
direct  inquiries.  The  publications  which  are  strong  there  are 
sending  more  business  direct.  It  is  easy  to  find  out  which  those 
publications  are.  In  fact,  the  tables  tell  which  publications  are 
strongest  in  each  state,  and  the  relation  of  dealer  sales  to  direct 
sales  in  each  state.  Taking  this  information  in  connection  with 
the  cost  per  inquiry  and  the  cost  per  sale  for  each  publication, 
figured  on  the  basis  of  direct  sales,  the  company  thinks  it  can 
tell  pretty  accurately  which  publications  to  drop  and  which  to 
continue. 

With  the  understanding  that  the  cost  per  sale  figured  on  direct 
inquiries  is  not  always  just,  however,  the  company  sends  return 
postcards  to  all  "  dead  "  inquiries  from  publications  whose  cost  is 
apparently  high.  These  cards  offer  a  new  set  of  fittings  for  the 
lamp  in  return  for  information  as  to  whether  the  customer  has 
bought  from  a  dealer  since  sending  in  the  inquiry  direct,  and  the 
dealer's  name.  All  such  sales  are  credited  to  the  publication. 
This  method  is  not  followed  with  publications  whose  cost  per  sale 
is  low,  because  the  only  object  of  the  information  is  to  determine 
the  advisabiHty  of  dropping  a  pubUcation  from  the  list.  The 
company  says  that  80  per  cent  of  the  cards  are  returned,  and  it 
beheves  the  returns  are  accurate,  since  the  fittings  offered  would 


SALES  AND  ADVERTISING  STATISTICS  357 

be  of  no  earthly  use  to  anyone  who  did  not  own  a  lamp  of  the 
particular  make. 

Of  course,  the  company  does  not  regard  the  plan  as  infallible, 
but  is  willing  to  let  the  sales  records  speak  for  the  efficiency  of 
it.  The  charts  are  used  to  determine  even  such  comparatively 
minor  questions  as  whether  to  continue  35-line  copy  in  a  certain 
publication  or  to  increase  to  56  lines.  If  it  doesn^t  do  anything 
else,  it  gives  the  man  who  is  responsible  for  the  advertising  a 
basis  upon  which  to  demonstrate  the  necessity  for  keeping  the 
appropriation  from  going  down  hill. 

XXVI.  Fallacy  of  Rating  Mediums  on  Inquiry 
Basis  ^ 

By  Luther  D.  Fernald 

The  value  of  a  strong  inquiry-attachment  as  a  means  of  helping 
to  sell  goods  sold  through  dealers  is  debatable;  I  personally  think 
there  is  frequently  a  mistaken  emphasis  on  inquiries,  to  such  an 
extent  that  the  very  best  possible  result  —  the  actual  purchase 
of  the  merchandise  from  a  dealer  —  is  subordinated. 

In  other  cases  inquiries,  properly  made  secondary,  do  serve  the 
useful  purpose  of  gleaning  an  additional  harvest  out  of  the  adver- 
tising, after  the  main  crop  of  results  has  been  harvested  through 
normal  channels  —  the  retail  trade. 

But  for  advertisers  of  products  sold  through  dealers  the  inquiry 
test  of  the  value  of  mediums  is  fallacious.  For  the  advertiser  is 
buying  sales,  not  inquiries,  and  yet,  being  unable  to  count  sales, 
he  would  count  inquiries.  The  only  man  who  can  gauge  the  value 
of  a  medium  positively  is  the  mail-order  advertiser,  who  judges 
publications  not  on  the  number  of  replies,  but  on  the  number  of 
sales. 

As  a  matter  of  fact,  the  wise  mail-order  advertiser  cuts  off  the 
publication  which  produces  too  many  inquiries,  if  the  number  of 
inquiries  is  too  great  in  proportion  to  sales.  The  high  cost  of 
following  up  inquiries  will  offset  a  low  cost  of  getting  them,  and 
result  in  a  too-high  cost  per  sale  as  compared  with  other  publica- 

1  Printers'  Ink,  November  20,  1913,  pp.  104-109.  Reprinted  by  permission 
of  Printers'  Ink. 


358  BUSINESS  STATISTICS 

tions  whose  inquiries  come  from  ouyers  instead  of  mere  inquiries. 
His  best  publications  are  the  ones  producing  as  few  as  possible 
waste  inquiries. 

But  the  advertiser  who  sells  through  dealers  has  no  sales  test, 
and  gives  the  prize  to  the  publication  producing  inquiries  at  the 
lowest  cost. 

Now  the  mail-order  man  has  to  have  inquiries  to  make  sales. 
The  only  way  people  can  buy  his  goods  is  to  write  to  him.  If 
people  don't  write  him  he  doesn't  sell  them. 

On  the  other  hand,  the  easiest  and  best  way  for  the  consumer 
to  get  the  dealer-sold  merchandise  he  sees  advertised  is  to  go  to 
a  dealer  and  buy  it.  Yet  some  advertisers,  wanting  people  to  go 
to  their  dealers  to  do  their  buying,  nevertheless  put  a  premium 
on  the  publications  whose  readers  do  not  do  this  very  thing.  They 
praise  the  publications  which  bring  them  lots  of  inquiries,  and 
condemn  those  that  don't. 

A  I  GO  per  cent  efficient  medium,  reaching  only  people  who  could 
buy  and  use  an  advertiser's  goods,  and  living  where  the  goods 
themselves  are  readily  in  sight  and  on  sale,  would  do  its  work  in 
sending  people  into  the  stores  to  ask  for  the  goods,  instead  of 
writing  for  some  pictures  of  them.  A  medium  reaching  only 
people  who  could  buy  his  goods,  but  50  per  cent  of  whom  live 
where  the  goods  are  not  distributed,  would  produce  a  great  many 
more  inquiries.  Inquiries  in  this  case  would  probably  simply 
indicate  what  percentage  of  the  publication's  circulation  was 
outside  the  regular  course  of  trade. 

On  the  other  hand,  a  third  publication,  with  50  per  cent  of  its 
readers  good  prospects  living  where  the  goods  were  well  sold,  would 
have  in  the  other  50  per  cent  a  great  many  non-prospects.  If  the 
''  bait  "  for  the  inquiry  is  as  strong  as  it  frequently  is,  it  is  more 
likely  to  draw  inquiries  from  the  curious,  bargain-hunters,  etc. 
(both  children  and  grown-ups),  among  the  50  per  cent  non- 
prospects,  than  it  is  from  the  50  per  cent  real  prospects. 

My  point  is  not  that  no  inquiries  are  any  good,  but  that  in- 
quiries are  never  100  per  cent  good;  and  that  what  is  usually 
an  unsafe  test  for  the  mail-order  advertiser,  whose  whole  business 
must  be  done  through  inquiries  by  mail,  is  always  an  unsafe  test 


SALES  AND  ADVERTISING  STATISTICS  359 

for  the  advertiser  whose  best  inquiries  are  those  made  to  his 
dealers  —  whose  mail  inquiries  are  incidental  rather  than  funda- 
mental, and  who  has  no  final  test  of  sales,  but  merely  the  fiction 
of  "  the  law  of  averages  "  to  fall  back  on. 

The  mail-order  man  says:  "Write  for  my  catalogue  —  the 
only  way  to  get  the  goods  I  sell."  Yet  even  he  can't  judge 
mediums  by  inquiries. 

While  some  national  advertisers  say:  "Go  to  the  dealer  for 
our  goods  "  —  and  then  judge  their  mediums  by  the  number 
of  people  who  write  for  a  catalogue,  or  even  a  calendar  or 
puzzle ! 

When  I  heard  of  a  campaign  which  combined  the  essential 
features  of  both  a  mail-order  campaign  requiring  inquiries  and 
tracing  sales,  and  a  dealer  campaign  having  national  distribution 
of  the  article  sold,  I  knew  that  its  showings  would  be  of  unusual 
value  in  proving  the  fallacy  of  the  inquiry-test. 

I  am  going  to  give  you  the  actual  facts  of  this  campaign.  By 
not  divulging  the  advertiser's  name,  more  exact  information  can 
be  given  than  would  be  otherwise  possible.  But  I  have  detailed 
proofs  of  every  point  for  anyone  who  wants  them. 

The  records  I  quote  from  cover  the  last  and  largest  complete 
season,  with  an  appropriation  of  $55,000,  in  fifteen  great  national 
mediums.  Campaigns  of  two  previous  seasons  also  bear  out  these 
findings. 

The  proposition  advertised  was  a  set  of  books  ranging  in  price 
from  popular  editions  of  $35  to  $60  up  to  sets  in  more  expensive 
limited  editions  in  finer  bindings,  running  to  several  hundred 
dollars. 

The  advertiser  had  sold  books  by  canvassers  all  over  the  coun- 
try for  years,  and  had  a  selling  staff  equivalent  to  very  good 
distribution  for  an  ordinary  article  of  merchandise.  This  partic- 
ular set  was  not,  however,  sold  by  booksellers. 

While  he  intended  to  follow  up  every  inquiry  either  by  a  can- 
vasser's personal  call,  or  by  a  strong  mail  follow-up,  he  realized 
that  the  way  for  many  sales  made  by  his  sales  organization  would 
be  paved  by  this  advertising,  even  though  not  traceable  directly 
to  advertising. 


360  BUSINESS  STATISTICS 

The  inquiry  appeal  was,  however,  made  strong,  as  the  only  way 
one  could  secure  the  books  would  be  from  the  publisher  or  his 
canvassers.  At  the  same  time  he  made  his  copy  large  and  its 
appeal  strong,  to  pre-sell  its  readers  as  much  as  possible,  and  cut 
curiosity  inquiries  to  the  minimum. 

All  inquiries  were,  if  possible,  followed  up  by  canvassers,  using 
the  inquiry  as  an  invitation  to  call.  Inquiries  out  of  reach  of  the 
selling  organization  were  followed  up  by  mail.  The  great  ma- 
jority of  inquiries  were  followed  by  salesmen,  and  most  of  the 
sales  were  made  by  personal  canvass. 

This  rather  elaborate  preliminary  is  given  to  show  the  bearing 
of  this  campaign  where  results  could  be  traced  to  the  average 
general  publicity  campaign  with  an  inquiry  attachment  where 
the  very  best  possible  result  —  the  actual  purchase  of  the  goods 
from  the  dealer  —  never  comes  to  the  advertiser's  attention 
at  all. 

The  manufacturer  of  shirts  or  toilet  accessories,  or  ice  cream 
freezers,  or  motorcycles,  or  food  products,  has  hundreds  or 
thousands  of  retailers  selling  his  product. 

His  distribution  is  equivalent  to  the  book  advertiser's  distribu- 
tion, except  that  his  distribution  is  usually  evident  to  the  average 
buyer  of  goods  at  stores,  while  the  only  way  the  consumer  could 
get  this  publisher's  product  was  by  writing  him  or  by  having  a 
canvasser  happen  to  call  on  him. 

Actually  the  usefulness  of  inquiries  was  far  greater  to  this 
publisher  than  to  any  general  advertiser  selling  through  stores. 
They  were  as  necessary  a  part  of  his  selling  plan  as  they  frequently 
are  a  positive  hindrance  to  sales  on  generally  distributed  products. 

The  main  point  is  that  even  if  this  advertiser  had  judged  his 
medimns,  his  dates  of  insertions,  his  sizes  of  copy,  solely  by 
inquiries  he  would  have  been  as  far  from  knowing  the  real  worth 
of  each  correctly  as  the  average  advertiser  who  counts  inquiries 
but  can't  count  sales. 

Now,  what  was  the  medium  which  proved  to  be  the  most 
efficient  medium  per  dollar  expended  ?  Was  it  the  lowest  in  cost 
of  inquiry  ?  Was  it  next  to  lowest  ?  Was  it  the  third,  fourth  or 
fifth  ?    None  of  these. 


SALES  AND  ADVERTISING  STATISTICS  361 

The  publication  first  in  low  cost  per  sale  was  eleventh  in  rank  in 
cost  of  inquiries. 

On  the  other  hand,  the  medium  first  in  inquiry  cost  was  fourth 
in  sales  cost. 

The  sixth  publication  in  cost  per  inquiry  was  third  in  cost  per 
sale. 

The  third  in  cost  per  inquiry  was  fifth  in  cost  per  sale. 

The  fourth  in  the  inquiry  list  was  eighth  in  the  sales  list. 

The  ninth  in  inquiry  cost  was  fifteenth  in  sales  cost. 

Other  inquiry  rankings  are  about  as  poorly  indicative  of  trace- 
able sales  value.  There  is  not  even  any  consistency  of  inconsist- 
ency. You  can  estabhsh  nothing,  from  this  showing  —  exc^t 
that:  The  number  of  inquiries  simply  proves  nothing  at  all  about 
number  of  sales. 

In  only  one  case  would  the  rule-of- thumb  method  have  hit  it 
right;  the  publication  second  in  inquiry  cost  was  also  second  in 
sales  cost.    One  case  out  of  fifteen! 

Here  are  some  more  tests  of  the  inquiry- test: 

All  except  two  inquiries  from  one  medium  were  called  on  by 
canvassers;  these  two  were  followed  by  mail  and  each  person 
bought  a  set.  Fifteen  from  another  were  followed  up  in  the  same 
way,  and  one  sale  resulted.  Thirty-one  from  another  produced 
no  sales  at  all.  Ninety-five  from  another  produced  one  sale. 
One  set  was  sold  among  another  publication's  188  inquiries 
followed  by  mail. 

Other  inquiries  numbering  399  from  three  insertions  in  one 
publication  produced  $435  in  sales,  while  38  inquiries  from  one 
insertion  in  another  produced  $513. 

As  in  other  cases,  the  inquiry- test  would  have  cut  off  the  real 
producer. 

Try  this  on  your  inquiry- test:  Cost  of  inquiry  for  publication 
A  was  half  as  high  as  for  B,  and  one- fourth  as  high  as  for  C;  yet 
A  cost  12  per  cent  more  per  dollar  of  sales  than  B,  and  16  per  cent 
more  than  C. 

Is  an  inquiry  an  inquiry  for  all  that  ? 

But  I  am  not  through  yet.  Some  advertisers  I  know  would 
have  thrown  up  their  hands  in  holy  horror  at,  and  rushed  a  can- 


362  BUSINESS  STATISTICS 

cellation  to  the  medium  which  cost  over  $25  an  inquiry  one 
month.  Yet  each  of  these  $25  inquiries  meant  eighty  times  as 
much  money  for  the  advertiser  as  another  publication's  $2.50 
inquiries. 

Verily  an  inquiry  in  the  mail  is  no  indication  of  a  buyer  in  the 
store. 

Another  example:  One  piece  of  copy  in  one  publication  pro- 
duced nearly  twice  as  many  inquiries  as  another  piece  of  copy  of 
the  same  size  run  shortly  after.  The  inquiry- test  would  have 
proved  the  second  copy  weak  or  run  too  close  to  the  first.  The 
second  copy,  with  half  as  many  inquiries,  resulted  in  $53  more 
sales  than  the  first  —  and  both  did  well. 

Another:  The  same  copy  which  produced  phenomenal  returns 
of  2,359  inquiries  from  one  publication  produced  only  401  from 
the  other.  Inquiry  cost  on  the  2,359  was  the  low  record  of  the 
campaign.  The  401  inquiries  cost  over  four  times  as  much  per 
inquiry. 

But  401  inquiries  spent  exactly  $45  more  with  the  advertiser 
than  the  other  2,359  did. 

But  why  go  further  ?  In  the  light  of  such  facts  as  these,  may 
I  not  be  so  bold  as  to  suggest  that  the  little  inquiry  book  kept  by 
the  $6  or  $8  a  week  girl  is  not  the  infallible  and  final  answer  on 
advertising  mediums  that  you  may  have  thought  it  is  ? 

May  I  be  so  bold  as  to  suggest  that  it  be  regarded  as  an  inter- 
esting sidelight  on  your  advertising  —  perhaps  a  danger-signal 
system  —  but  not  a  substitute  for  your  own  and  your  advertising 
agent's  good  gray  matter  in  picking  the  advertising  mediums  in 
which  you  spend  your  thousands  or  hundreds  of  thousands  of 
dollars,  in  not  only  helping  your  dealers  sell  your  goods  now,  but 
also  in  making  that  permanent  investment  in  the  minds  and 
memories  of  the  people  which  makes  good  advertising  a  real 
investment  rather  than  an  expense  ? 


SALES  AND  ADVERTISING  STATISTICS  363 

XXVII.  Why  Cost  Per  Inquiry  is  a  Bad  Guide  ^ 

By  S.  R.  McKelvie 

The  article  by  Robert  Frothingham,  regarding  cost  per  inquiry, 
in  a  recent  issue  of  Printers^  Ink,  was  one  of  the  most  able  dis- 
cussions I  have  ever  read.  It  prompts  me  to  offer  some  further 
argument  along  the  same  line. 

I  have  in  mind  a  certain  large  advertiser,  whose  distribution  is 
practically  entirely  through  regular  trade  channels —  jobbers 
and  retailers  —  who  absolutely  insists  that  he  must  have  inquiries. 

First,  to  judge  the  relative  strength  of  his  various  advertise- 
ments and  appeals;  second,  to  determine  the  advertising  value 
of  mediums  he  uses. 

Let  me  first  eliminate  from  this  consideration  mail-order  houses. 
These  (with  a  few  exceptions)  —  since  they  depend  entirely  on 
inquiries  to  promote  their  sales  —  are  probably  justified  in  using 
the  "  cost-per-inquiry ''  rule.  (The  exceptions  would  be  those 
few  very  large  mail-order  houses  whose  advertising,  by  reason  of 
the  tremendous  number  of  catalogues  they  have  already  dis- 
tributed, becomes  in  the  nature  of  "  publicity "  advertising. 
Their  catalogue  bears  the  same  relation  to  them  as  does  the  dealer 
to  you.) 

But  with  reference  to  the  advertiser  who  sells  through  dealers, 
I  honestly  and  sincerely  believe  that  "  cost-per-inquiry  "  as  a 
means  of  determining  advertising  value  is  an  absolute  fallacy. 
Mind  you,  this  is  no-fly-by-night  idea  or  theory  —  I  have  been 
working  on  this  subject  for  four  years. 

And  here  are  my  reasons  for  believing  as  I  do  with  regard  to 
so-called  "publicity"  advertising: 

I.  The  copy  itself  is  an  absolute  barrier  against  the  "  cost- 
per-inquiry  "  plan.  To  assure  the  dealer  that  the  advertising  is 
being  done  for  his  (the  dealer's)  benefit,  the  advertiser  says  in 
72-point  black-face  type:  "  Ask  your  dealer  "  or  "  For  sale  by  all 
dealers."  In  6-point  light-face  Roman  type  he  says:  "  Send  to 
me  for  catalogue  XY1309." 

1  Printers'  Ink,  February  27,  1913,  pp.  107-112.  Reprinted  by  pennission  of 
Printers'  Ink. 


364  BUSINESS  STATISTICS 

2.  Certain  high-character  publications — farm  and  city  papers 
—  are  doing  and  have  for  some  time  done  extensive  promotion 
work  in  the  interest  of  manufacturers  selling  through  dealers. 
These  publications  are  educating  their  readers  as  to  the  impor- 
tance of  buying  trade-marked  goods.  Since  such  goods  are 
handled  practically  entirely  by  dealers,  it  stands  to  reason  that 
this  promotion  work  tends  immediately  to  send  the  prospect  to 
the  dealer  and  to  reduce  to  a  minimum  the  writing  for  catalogues, 
booklets,  etc.,  by  the  reader. 

There  is  no  adequate  reason  why  the  prospective  purchaser  of 
an  article  advertised  as  "  For  sale  by  all  dealers  "  should  write 
for  a  catalogue.    Look  at  the  question  from  this  standpoint. 

Why  should  anyone  take  the  time  to  write  for  a  catalogue,  wait 
for  a  reply,  then  go  to  his  dealer  to  inspect  and  buy  the  article  ? 
Why  should  he  ?  In  the  end  he  goes  to  the  dealer  anjrway.  Why, 
then,  waste  time  writing  and  waiting  for  a  catalogue  —  two 
entirely  superfluous  operations  ?    Why  should  he  ? 

Here  is  Bill  Brown,  for  instance.  He  has  been  thinking  some 
of  bu5dng  an  article  which  is  extensively  advertised  by  two  large 
companies.  He  is  just  feeling  in  the  buying  mood,  when  he  reads 
your  advertisement  offering  this  article.  He  reads,  "  For  sale  by 
all  dealers."  He  knows  he  wants  such  an  article.  It  is,  therefore, 
just  a  question  with  him  whether  or  not  yours  is  as  good  as  the 
other  fellow's.  But  "  For  sale  by  all  dealers."  Do  you  suppose 
for  one  moment  that  Bill  Brown  is  going  to  heed  your  next  sug- 
gestion, "  Write  for  my  catalogue  "  ?  Well,  he  won't!  He  has 
confidence  in  the  paper  that  carried  your  advertisement;  he  rather 
"  suspects  "  that  you  are  reKable.  What  he  wants  to  know  about 
your  product  he  can  find  out  by  "  asking  his  dealer,"  and  with  less 
time  and  trouble,  certainly,  than  he  could  by  first  writing  to  you, 
waiting  for  your  reply,  and  then  calling  on  the  dealer  anyway. 

I  tell  you,  full-grown  men  and  women  of  normal  intelligence  do 
not  read  their  favorite  periodicals  with  pencil  and  paper  in  hand, 
waiting  for  the  opportunity  to  write  for  a  catalogue;  that's  a 
certainty.  You  tell  them:  "Here,  you  need  this  article,  it's 
advantages  are  so  and  so,  it's  made  so  and  so,  and  you  can  get 
detailed  information  from  your  dealer." 


SALES  AND  ADVERTISING  STATISTICS  365 

Why,  then,  should  that  reader  send  for  your  catalogue  ? 

Well,  perhaps  you  will  say:  "  But  I  offer  the  reader  a  valuable 
book  free.    Why  shouldn't  he  ask  for  it  ?  " 

Take  the  case  of  Bill  Brown  again.  He's  in  the  market  for  your 
product.  He  sees  your  advertisement.  He  knows  that  he  can  get 
complete  information  about  your  product  "  at  his  dealer's."  He 
will  probably  do  so.  If  he  sends  for  your  catalogue  first,  does 
that  indicate  that  he's  a  better  prospect  ? 

Well,  then,  isn't  it  reasonable  that  the  working  out  of  adver- 
tising plans  according  to  the  "  dope  "  sheet  is  not  only  an  absolute 
fallacy,  but  will,  in  many,  many  cases,  operate  against  the  best 
interests  of  the  advertiser  ? 

But  the  advertiser  says:  "  If  I  do  not  solicit  and  receive  in- 
quiries, how  can  I  judge  the  value  of  mediums  or  copy  ?  " 

I  shall  answer  in  Yankee  fashion,  with  another  question:  "  Do 
you  honestly  believe  in  advertising  ?  " 

If  you  don't,  quit.  And  quickly!  If  you  think  that  money 
spent  for  advertising  is  a  "  necessary  expense  "  —  Quit! 

And  it  is  my  belief  that  the  average  "  publicity  "  advertiser 
who  is  always  watching  the  "  dope  "  sheet  falls  in  that  category. 
He  credits  all  increase  in  sales  not  directly  traceable  to  an  adver- 
tisement exclusively  to  the  efforts  of  his  salesmen.  Only  inquiries 
showing  that  they  were  prompted  by  an  advertisement  are  cred- 
ited to  advertising.  And  when  he  has  sent  a  catalogue,  and  no  sales 
are  made  directly  to  those  inquiries,  "  advertising  is  a  failure." 

But,  if  you  are  a  member  of  the  other  class  (and  I'm  glad  to 
believe  that  then  you  will  be  with  the  majority),  if  you  are  one  of 
those  advertisers  who  have  a  whole-hearted  belief  in  the  value  of 
advertising,  then  you  will  believe  also  in  the  value  of  those  things 
that  make  advertising  an  active  and  compelling  force  in  the  sales 
department  of  your  house. 

And  that  means,  I  believe,  that  you  will  not  watch  the  "  dope  " 
sheet  on  inquiries,  but  will  watch  the  record  of  your  sales,  which 
is  the  only  real  test. 

For  three  years,  we  will  say,  you  have  been  selling  around 
$10,000  worth  of  your  goods  in  the  state  of  Nebraska,  at  sales 
expense  of  $1,000. 


366  BUSINESS  STATISTICS 

Then  you  spend  $i,ooo  in  advertising  your  product  to  the 
people  in  Nebraska  most  likely  to  buy  of  your  dealers.  Following 
this  investment  in  advertising  of  $i,ooo,  your  Nebraska  sales 
reach  $20,000.  What  matter  if  you  never  get  an  inquiry  ? 
Would  you  not  be  willing  to  give  your  investment  of  $1,000  for 
advertising  credit  for  the  increase  ?    Of  course  you  would. 

Now  then,  this  brings  us  back  to  finding  a  substitute  for  the 
"  cost-per-inquiry  "  fallacy. 

"  What  copy  ?  "  has  been  discussed  so  frequently  in  Printers' 
Ink,  before  advertising  clubs  and  in  other  advertising  trade 
journals,  and  each  individual  advertiser  has  his  own  problems 
to  meet  in  preparation  of  copy,  that  I  shall  not  touch  on  this 
subject  now. 

Nor  can  there  be  an  infallible  rule  by  which  to  judge  mediums. 
A  few  general  principles,  at  least,  will  apply  to  almost  all  cases. 

1.  What  class  or  classes  of  mediums  will  reach  the  people  who 
are  your  prospects  ?  Shall  it  be  newspapers,  magazines,  farm 
papers,  billboards,  street  cars,  etc.  ? 

2.  Having  selected,  for  instance,  farm  papers  as  probably 
reaching  the  largest  proportion  of  your  prospects,  you  must 
decide  what  farm  paper  most  effectively  and  most  economically 
covers  your  territory. 

(a)  What  percentage  of  its  circulation  is  in  your  territory  ? 

(b)  What  percentage  of  its  circulation  is  "  home  circulation," 
i.  e.,  in  the  restricted  territory  whose  good  interests  that  publica- 
tion can  serve  reasonably  well  ? 

(c)  How  is  that  circulation  secured,  both  "  at  home  "  and  in 
outside  territory  ? 

(d)  What  is  the  publication's  standing  in  its  community,  and 
among  its  subscribers  ? 

{e)  Who  pays  for  the  paper  ?  Does  the  reader  himself  pay  for 
it,  or  is  its  circulation  secured  by  selling  yearly  subscriptions  at 
wholesale  to  banks,  manufacturers,  etc.  ? 

(/)  Why  is  it  bought  ?  Because  it  is  wanted  —  a  necessity  — 
and  therefore  paid  for  by  the  reader  himself,  or  because  of  the 
offer  of  a  free  premium  or  of  a  half  dozen  publications  all  for  the 
price  of  one  ?    Or  is  the  paper  paid  for  because  the  reader  needs  a 


SALES  AND  ADVERTISING  STATISTICS  367 

pocket-knife,  shotgun,  suit  of  clothes,  or  a  piano,  anyway,  and 
can  virtually  get  the  paper  free,  and  so  takes  it  to  use  for  kindling? 

And  finally,  the  advertiser  must  determine  from  a  consideration 
of  all  these  things  whether  that  particular  paper  is  the  logical  one 
for  him  to  use.  The  advertiser  has  a  right  to  all  this  informa- 
tion, and  every  legitimate  publication  will  be  glad  to  furnish  it. 

Based  on  the  "  record  of  results,"  many  an  advertising  cam- 
paign has  been  a  total  failure.  Based  on  a  careful  study  of  the 
advertising  problems  along  the  line  of  suggestions  I  have  made, 
using  only  good  media  and  carefully  preparing  loo-per-cent-right 
copy,  every  campaign  will  be  a  success. 

Along  the  line  of  the  quality  of  circulation,  as  I  have  just  stated, 
I  have  recently  conducted  an  investigation  which  emphasizes 
most  emphatically  that  the  publication  which  stands  highest  in  its 
territory  is  not  always  the  one  that  will  bring  the  most  inquiries. 
From  thirty-three  letters  received  from  farmer-owners  of  auto- 
mobiles, in  which  the  question  was  asked,  "  What  is  your  favorite 
farm  paper  ?  "  the  results  were  as  follows:  The  total  number  of 
publications  mentioned  as  favorites  was  fourteen,  and  the  number 
of  times  each  was  mentioned  ranked  as  follows:  13-3-3-3-2-2- 
i-i-i-i-i-i-i-i. 

Of  the  publications  mentioned,  two  are  rated  as  having  circula- 
tions of  over  6,000,000;  four  are  rated  as  having  over  1,000,000, 
and  the  majority  of  the  balance  are  rated  as  having  over  50,000 
circulation,  except  the  pubKcation  which  was  named  thirteen 
times  as  the  favorite,  and  it  has  a  circulation  of  less  than  45,000. 

In  a  competitive  showing  on  "  cost-per-inquiry,"  the  publica- 
tion which  was  named  thirteen  times  in  this  investigation  would 
rarely  be  at  the  top  of  the  list,  and  yet  no  advertiser  will  deny 
that  the  very  fact  that  it  was  named  thirteen  times,  or  more 
than  four  times  as  many  times  as  any  other  pubKcation  in  the  list, 
gives  it  an  indelible  stamp  as  the  very  best  medium  to  use  in  the 
territory  which  it  covers. 

I  should  hasten  to  add  in  connection  with  the  test  to  which  I 
have  just  referred  that  in  making  the  investigation,  a  double  postal 
card  was  used,  with  nothing  to  indicate  whence  the  request  for 
information  came.    The  inquiry  was  as  follows :  — 


368  BUSINESS  STATISTICS 

One  of  the  largest  problems  in  selling  automobiles  is  that  of  advertising. 

I  want  to  know  how  I  can  best  advertise  to  the  class  of  farmers  who  buy- 
automobiles.  I  understand  that  you  are  an  automobile  owner  and  that  you 
are  a  farmer. 

So  I  am  going  to  ask  you  to  answer  just  one  question; 

What  is  your  favorite  farm  paper  ? 

I  have  nothing  to  sell  to  you,  and  to  assure  you  that  I  mean  this,  I  am  not 
signing  my  name,  nor  do  I  ask  you  to  sign  yours. 

Just  answer  this  one  question  on  the  enclosed  postal,  and  you  will  be  doing 
me  a  great  favor. 

Yours  with  thanks, 
P.  0.  Box  488,  Lincoln,  Nebraska. 

The  only  inscription  on  the  return  postal  card  was  the  post 
office  box  number  and  address  and  "  My  favorite  farm  paper  is 

."     This  was  done  so  that  no  favoritism 

could  possibly  be  shown  because  of  the  source  of  inquiry  being 
known.  And  I  therefore  consider  that  the  test  was  absolutely 
fair  to  all  publications. 

Therefore,  in  renewing  my  statement  that  "  cost-per-inquiry  " 
as  a  means  of  determining  the  correct  mediums  to  use  is  not  only 
a  fallacy  but  one  of  the  greatest  enemies  of  successful  advertising, 
it  is  fair  to  draw  the  following  conclusions :  — 

1.  Copy  itself  is  a  barrier. 

2.  The  "  dope ''  sheet  is  not  a  judge  of  mediums,  owing  to  the 
very  great  difference  in  various  methods  of  securing  circulation. 

3.  It  isn't  reasonable  to  expect  a  good  prospect  first  to  write, 
then  wait  for  a  catalogue,  when  he  would  much  rather  go  to  the 
dealer  at  once,  and  could  do  so  with  much  less  inconvenience  to 
himself. 

4.  Because  those  papers  —  often  the  cheapest  class  of  near- 
free  circulation,  mail-order  publications  —  which  by  their  very 
method  of  securing  circulation  educate  their  readers  to  write  for 
"  beautiful  illustrated  booklets  absolutely  free  "  are  at  the  very 
head  of  the  ^'  dope  "  sheet. 

5.  Because  the  advertiser  who  follows  the  "  dope  "  sheet  will 
be  compelled  almost  invariably  to  cut  out  the  mediums  which  are 
giving  him  the  largest  measure  of  cooperation  as  between  him- 
self and  the  dealer.  Naturally,  that  result  tends  to  dampen  the 
ardor  of  publications  engaged  in  this  cooperative  dealer  work. 


SALES  AND  ADVERTISING  STATISTICS  369 

XXVIII.  Forecasting  Results  of  Sales  Letters  ^ 
By  H.  McJohnston 

"  Here  are  three  letters;  be  sure  to  give  them  all  the  same  test," 
said  the  copy  chief  in  a  Western  advertising  agency  to  a  manufac- 
turer of  medical  appliances,  who  was  starting  a  special  mail-sales 
campaign  direct  to  physicians  and  surgeons. 

"  But  I  asked  you  to  prepare  only  one  letter,"  replied  the 
manufacturer.  "  I  do  not  want  any  follow-ups  on  this  first 
mailing  until  I  see  how  the  first  letter  pulls  —  until  I  get  in  some 
replies  to  guide  us  in  making  the  follow-ups  more  effective.  And 
I  wanted  to  test  the  ability  of  your  copy  department  by  the 
way  this  first  letter  takes  hold  before  letting  you  prepare  other 
letters  or  handle  other  parts  of  my  advertising,  just  as  I  told 
you." 

The  copy  chief  listened  patiently;  then  asked  the  manufacturer 
to  read  the  three  letters  carefully,  and  again  waited. 

"  You  don't  call  this  a  follow-up  series  ?  "  the  prospective 
client  soon  questioned.  "  They  are  pretty  much  alike.  In  fact, 
either  one  of  them  ought  to  make  a  fairly  good  first  letter,  if  my 
judgment  is  worth  anything." 

"  Glad  to  hear  you  say  it;  that's  just  what  they  are,"  smiled 
the  copy  chief.  "  Give  them  all  the  same  test;  use  the  one  that 
pulls  best  on  your  big  list  of  names.  If  you  don't  get  a  pay  test 
out  of  either  of  them,  let  me  know  and  we'll  try  again.  You  told 
us  that  if  we  got  up  a  first  letter  that  would  pull  satisfactorily  you 
would  very  likely  let  us  handle  your  account.  We  are  not  taking 
any  chances.  Anyway,  the  day  of  hit-or-miss  circular  letters  is 
gone. 

"  You  know  from  experience,  just  as  we  do,"  he  continued, 
*'  that  it  is  unsafe,  unsatisfactory  and  often  impossible  to  judge 
the  '  pull '  in  a  letter  or  an  advertisement  before  it  is  put  to  the 
test.  Therefore,  whenever  it  is  possible  —  usually  it  is  —  we 
advise  a  test  of  letters,  the  value  of  which  depends  upon  direct 
results,  before  the  letter  is  mailed  to  a  big  fist." 

1  Printers'  Ink,  February  27,  1913,  pp.  59-63.  Reprinted  by  permission  of 
Printers^  Ink. 


370  BUSINESS  STATISTICS 

Then  the  copy  chief  explained  in  detail  how  the  three  letters 
were  to  be  sent  to  three  small  test  Hsts  of  names  —  five  himdred 
names  in  each,  fifty  of  which  were  to  be  chosen  from  each  of  ten 
different  states,  in  order  to  make  the  test  lists  average  up  as 
nearly  as  possible  to  the  big  list  with  respect  to  conditions.  He 
also  impressed  the  advisability  of  sending  each  of  the  three  letters 
to  three  equally  typical  test  lists  at  the  same  time. 

The  manufacturer  became  enthusiastic.  He  was  asked  to  pick 
out  the  letter  he  thought  would  pull  best  in  the  test.  The  copy 
chief  concurred  with  his  choice.  But  the  test  showed  that  this 
letter,  though  it  had  been  the  most  carefully  prepared  of  the  three, 
was  poorest  in  pulling  power;  while  the  one  they  considered  the 
poorest  pulled  far  beyond  expectations. 

Furthermore,  it  pulled  the  same  percentage  of  returns  when 
sent  to  the  big  list  of  some  thirty  thousand  names  —  and  this 
manufacturer's  account  is  now  solid  with  this  agency,  as  are  many 
other  accounts,  because  it  stopped  guessing. 

The  foregoing  incident,  which  happened  about  one  year  ago, 
illustrates  another  important  application  of  scientific  methods  to 
advertising.  It,  of  course,  is  simply  the  ancient  mathematical 
law  of  averages  applied  to  sales  letters  for  the  sake  of  certainty. 
In  most  cases  of  the  circularizing  of  large  Hsts  of  names  by  means 
of  form  letters,  the  "  test  letter  "  makes  possible  a  fairly  accurate 
forecast  of  returns. 

Shake  a  perfectly-balanced  die  with  only  "  one  "  and  "  two  " 
spots  alternately  placed  on  its  six  faces  from  a  dice  box  onto  a 
smooth,  level  surface  ten  times,  and  the  count  may  stand  ten 
"  ones  "  and  no  "  twos  "  —  though  it  is  likely  to  be  nearer  five 
"  ones  "  and  five  "  twos  ";  but  shake  one  hundred  times  and  the 
ratio  of  "ones"  in  comparison  to  '^  twos"  will  be  more  nearly  equal. 
Shake  a  thousand  times  and  the  ratio  of  difference  grows  less; 
and  the  greater  the  number  of  shakes,  the  less  will  be  the  ratio  of 
difference  between  the  "  ones  "  and  the  "  twos." 

That  is  a  crude  illustration  of  the  law  of  averages.  Applied  to 
the  form  sales  letter,  it  might  be  stated  like  this: 

Given  a  certain  result  of  a  certain  sales  letter  sent  to  a  fraction 
of  a  list  of  names,  chosen  so  that  they  will  be  typically  repre- 


SALES  AND  ADVERTISING  STATISTICS  371 

sentative  of  the  entire  list,  and  the  ratio  of  result  will  be  approxi- 
mately the  same  when  the  same  letter  is  sent  to  the  entire  list 
imder  the  same,  or  more  favorable,  conditions. 

The  word  "  approximately  "  is  used  not  because  the  law  of 
averages  is  erratic,  but  because  it  is  seldom  possible  more  than  to 
approximate  in  the  big  mailing  the  same  conditions  that  existed 
in  the  test.  Experience  reveals  a  hundred  and  one  things  that 
might  operate  to  change  conditions  and  make  them  more  or  less 
favorable  to  results.  That  is  the  primal  requisite  —  to  be  sure 
that  the  conditions  of  the  test  and  the  "  big  mailing  "  are  as 
nearly  as  possible  ahke;  for  when  the  percentage  of  results  varies 
noticeably,  the  cause  usually  may  be  traced  to  varying  conditions. 

Recently,  out  of  six  big  mailings  in  one  concern  that  sells  books 
by  mail  to  various  classes  of  men,  the  results  of  only  one  showed 
a  difference  of  as  much  as  one  per  cent  in  comparison  with  returns 
on  five  hundred  test  letters.  In  this  one  case  approximately  fifty 
thousand  names  were  on  the  entire  list,  out  of  which  the  letter 
pulled  990  orders,  or  approximately  two  per  cent;  while  on  the 
test  only  eleven  orders,  or  about  one  per  cent  returns  were  received. 

At  least  one  per  cent  returns  were  needed  to  make  it  a  "  pay 
test."  It  just  squeezed  through  the  barrier  —  a  cold,  accurate 
cost  calculation,  including  all  overhead  expense.  The  net  profits 
on  the  sales  that  letter  made,  not  figuring  in  the  selling  cost,  just 
a  little  more  than  balanced  that  selling  cost. 

Under  ordinary  conditions  this  "  pay  letter  "  did  not  pay 
enough  net  —  net  profit  over  all  expenses  —  to  warrant  sending 
it  out.  But  the  sales  manager  knew  that  the  mailing  on  the  big 
list  would  be  made  under  more  favorable  conditions  than  pre- 
vailed when  the  test  was  made;  for  the  test  went  out  in  Novem- 
ber, while  the  "  big  Ust  "  was  mailed  early  in  December  — 
nearer  the  holidays,  the  time  when  folks  would  be  more  Ukely  to 
buy  this  particular  set  of  books. 

Thus  the  seasons  of  the  year  are  important  varying  factors,  but 
broad  and,  as  a  rule,  easily  avoided.  Narrow  it  down.  Take  a 
letter  designed  to  sell  overcoats.  Just  because  it  pulls  Novem- 
ber I  is  not  necessarily  proof  that  it  will  pull  November  21,  when 
a  general  warm  wave  may  have  struck  the  territory  covered, 


372  BUSINESS  STATISTICS 

whereas  on  November  i,  it  was  biting  cold  throughout  that  terri- 
tory. Thus  weather  conditions  are  an  extremely  important  factor. 
In  the  case  of  the  book  letter  test  already  mentioned,  it  was  colder 
in  December,  as  well  as  nearer  the  holidays.  Folks  feel  more  like 
reading  in  cold  weather  than  they  do  in  warm.  That  also  was  one 
of  this  sales  manager's  minor  considerations. 

Various  classes  of  people  spend  their  money  more  readily  at 
various  times  of  the  year  for  various  things  and  for  various 
reasons.  After  a  good  crop  year  the  time  to  go  after  the  farmer  is 
late  in  the  fall,  except,  perhaps,  in  the  extreme  South  or  North. 
The  best  time  to  drum  the  average  merchant  on  something  new 
is  just  after  a  lucrative  holiday  season,  if  business  conditions 
have  not  been  affected  by  bad  weather,  strikes,  crop  shortages 
and  so  on,  which  suggests  business  conditions  to  be  another 
important  varying  factor.  These  conditions,  including  a  potent 
fluctuation  cause,  weather,  can  be  estimated  with  reason- 
able accuracy  from  Government  bulletins,  reports  and  the 
bulletins  of  commercial  agencies,  also  from  salesmen  and  the 
correspondence. 

Of  course,  the  main  point  as  applied  to  test  letters  is  that  all 
these  varying  factors  must  be  the  same,  or  more  favorable,  at 
the  time  of  the  "  big  mailing  "  as  when  the  test  is  made. 

If  possible,  it  is  found  better  to  make  the  test  under  slightly 
adverse  conditions  —  never,  however,  forgetting  to  consider  this 
handicap,  should  the  letter  not  pay  in  the  test;  for  the  difference 
in  conditions  might  make  it  the  most  profitable  letter  available 
for  the  big  mailing.  The  mail  salesman  must  remember  that 
varied  conditions  may  be  more  favorable  as  well  as  less.  Other- 
wise, many  a  tested  letter  that  could  earn  big  profits  might  be 
discarded. 

Often  minute  points  will  change  the  results  of  a  letter  from 
profit  to  loss.  A  manufacturer  of  aluminum  ware  put  out  a 
thousand  test  letters  offering  a  "  Starter  Assortment ''  to  retail 
dealers.  It  was  a  fair  test  and  the  results  paid  well.  The  same 
offer  was  made  to  a  list  of  twenty  thousand  names  of  dealers  in 
Eastern  and  Central  Western  States.  But  the  "  big  mailing  " 
fell  far  short  of  the  test  record,  though  it  paid  a  profit. 


SALES  AND  ADVERTISING  STATISTICS  373 

There  was  no  blizzard  nor  bad  weather  in  the  East  or  West,  the 
local  business  conditions  throughout  the  entire  territory  were 
good  so  far  as  could  be  learned.  Apparently  conditions  were 
identical  with  those  that  obtained  when  the  test  was  sent  out. 
The  failure  of  the  law  of  averages  to  hold  true  was  a  mystery  — 
until  the  mail-sales  manager  of  this  concern  observed  that  the 
test  letters  had  been  mailed  on  Monday,  and  reached  their  desti- 
nation on  Tuesday  or  Wednesday;  a  few  of  them  on  Thursday; 
whereas  the  greatest  part  of  the  "  big  mailing  "  had  been  put  into 
the  mails  on  Friday,  reaching  a  majority  of  the  retailers  on 
Saturday  —  the  busy  day  —  while  no  doubt  some  of  the  letters 
reached  port  on  Sunday,  to  be  tossed  into  the  waste  basket  on 
account  of  the  added  accumulation  of  mail  that  usually  arrives 
on  Monday.  Later  tests  proved  conclusively  that  this  was  the 
cause  of  the  difference. 

There  are  dozens  of  other  factors  to  be  considered  in  specific 
cases.  Their  consideration  is  what  makes  the  test  letter  valuable. 
Some  men  have  objected  that  there  is  not  time  for  testing.  But 
the  time  element  can  be  handled  accurately  with  few,  if  any, 
exceptions,  although  it  be  necessary  to  mail  the  test  under 
slightly  less  favorable  conditions. 

"  It's  a  matter  of  good  judgment  in  determining  the  possible 
difference  in  results  by  carefully  weighing  all  the  varying  condi- 
tions and  factors  that  might  change  results,"  says  the  advertising 
man  first  quoted.  "  But  this  requires  a  consideration  of  past 
experiences  and  records  and  an  exercise  of  sound  sense  in  no 
greater  degree  than  is  required  to  solve  hundreds  of  other  busi- 
ness problems.  And  the  twofold  benefit  —  guard  against  loss 
on  the  one  hand,  and  assurance  of  sales  on  the  other  —  makes 
this  problem  involved  in  harnessing  the  test  letter  system  to  the 
average  business  that  sells  by  letter  well  worth  solution. 

"  The  idea  back  of  this  growing  practice  is  sound,"  he  con- 
tinued, "  although  this  assertion  is  easier  to  demonstrate  by  actual 
experience  than  by  theoretical  reasoning.  That  may  be  why  the 
scientific  test-letter  idea  has  been  slow  in  taking  root." 

Experience  —  and  experience  alone  —  must,  and  has  for  many 
businesses,  estabHshed  the  degree  of  similarity  of  conditions, 


374  BUSINESS  STATISTICS 

including  the  quantity  of  names  necessary  to  make  the  results 
of  effort  that  differ  for  the  main  part  only  in  quantity  average  up 
near  enough  alike  for  practical  purposes.  The  number  of  names 
necessary  to  make  the  test  safe  varies,  and  is  also  fixed  by  experi- 
ence. Few  concerns  find  it  necessary  to  use  more  than  one  per 
cent  of  the  total  for  the  test.  Much  more  important  than  the 
number  of  names  in  the  test,  however,  is,  as  already  emphasized, 
the  similarity  of  conditions,  and  how  nearly  the  test  names 
typify  the  entire  list. 

The  necessity  of  all  this  caution  gives  the  test  letter  added 
value;  it  compels  attention  to  many  otherwise  neglected  factors 
that  have  much  to  do  with  the  success  of  a  form  sales  letter.  For 
one  thing,  it  lets  a  man  write  freely  and  naturally  without  that 
feeling  of  the  tremendous  responsibility  of  having  to  write  a  letter 
that  must  either  pull  or  lose  considerable  money;  for  many  a 
sales  letter  has  failed  to  pull  because  it  was  "  too  good  "  — 
worked  and  stewed  and  fumed  over  xmtil  all  the  action-compelling 
naturalness  was  worked  out. 

The  main  value  of  the  test  letter,  however,  is  not  the  fact 
that  the  necessary  comparison  of  all  the  conditions  of  the  test 
with  those  of  the  "  big  maihng  "  requires  a  thorough  analysis  of 
actual  conditions.  The  big  point  —  so  big  and  important  as  to 
stagger  the  business  man  now  experiencing  it — is  this:  The  test 
letter  practically  eUminates  uncertainty;  it  avoids  waste,  and 
by  the  same  stroke  builds  sales. 

XXIX.  Retail  Control  through  Sales  Records  ^ 

By  a.  W.  Montgomery 

Fluctuation  in  the  volume  of  business  by  departments  is  the 
one  objective  on  which  the  general  manager  of  a  many-line  store 
constantly  keeps  his  eye.  There  may  be  many  side  issues,  such 
as  adjusting  complaints,  encouraging  employees  and  altering 
methods  and  plans,  but  constantly  his  attention  reverts  to  the 
barometer  of  trade.  What  does  it  register  ?  If  below  a  certain 
mark,  what  is  the  trouble  ?    If  above,  why  ?    He  must  know  the 

^  Library  of  Business  Practice,  vol.  5,  pp.  188-200.  Reprinted  by  permission 
of  A.  W.  Shaw  Company.    Illustrations  of  forms  are  omitted. 


SALES  AND  ADVERTISING  STATISTICS  375 

reason  for  variations.  His  ability  to  expand  the  business  largely 
depends  upon  the  accuracy  with  which  he  senses  the  cause  of 
conditions. 

Department  One  may  show  by  its  daily  report  sales  of  $1,100 
in  excess  of  the  sales  for  the  corresponding  day  a  year  previous. 
This  gain  may  have  been  due  to  any  one  of  several  causes:  an 
advanced  season  on  the  line  carried,  heavier  advertising,  special 
sales  and  so  forth;  or  it  may  have  been  due  to  a  combination  of 
causes.  On  the  other  hand,  Department  Two  may  show  sales 
$900  less  than  last  season.  The  reason  for  the  loss  may  have  been 
a  backward  season,  generally  depressed  business,  insufficient 
advertising  and  so  forth.  In  either  event  the  actual  causes  for  the 
gain  or  loss  must  be  determined. 

Furthermore,  for  the  previous  season,  a  period  that  covers  six 
months,  Department  One  may  have  failed  by  15  per  cent  to  equal 
the  sales  of  the  season  prior  to  it.  Department  Two,  conversely, 
may  have  gained  20  per  cent  over  the  preceding  season.  In  com- 
parison with  the  one  daily  report  already  mentioned,  this  is 
paradoxical,  but  averages  taken  over  long  periods  will  explain. 

A  summary  of  the  causes  underlying  daily  fluctuations  for  the 
entire  season  serves  as  a  basis  for  determining  the  reasons  for  a 
total  gain  or  loss.  And  these  season-causes  must  be  determined 
by  watching  daily  sales  in  each  department.  The  daily  sale  is  the 
index;  its  total  for  any  period — a  week,  ten  days,  thirty  days,  six 
months  —  gauges  the  fluctuation.  It  tells  the  percentage  of 
gains  and  losses  by  departments.  These  indicate  the  need  of 
cause  prescriptions  that  reach  business  building  policies. 

In  this  respect,  there  is  no  difference  between  a  single  line  and 
a  many-line  store,  so  far  as  the  management  is  concerned.  In  the 
former  there  are  the  same  problems  to  be  met  and  solved,  only 
fewer  of  them.  In  the  latter,  each  department  is  a  store,  and  it  is 
but  necessary  to  treat  these  departments  as  individual  stores  to 
obtain  the  same  result. 

If  there  is  any  difference,  it  is  this:  the  small  merchant  has 
the  one  final  word  when  it  comes  to  saying  definitely  what  mer- 
chandise shall  go  on  the  shelves.  The  general  manager  of  the  big 
store  is  often  the  head  merchandise  man  and  must  keep  his  hand 


376  BUSINESS  STATISTICS 

on  the  merchandise  for  all  departments,  indirectly  through  assist- 
ants. It  is  at  this  very  point  that  the  fluctuation  in  sales  must 
guide  him  in  whatever  adjustments  he  makes. 

Fluctuation  in  business  makes  it  necessary  for  the  general 
manager  to  keep  track  of  daily  sales;  this  can  be  done  only  by 
watching  each  department  as  a  unit  and  adding  for  a  total,  to 
ascertain  the  general  increase  or  decrease  in  trade. 

Each  morning  at  nine  o'clock  in  one  store,  the  general  manager 
gets  a  daily  department  report  that  summarizes  each  of  the  fifty- 
five  departments;  the  sales,  say,  for  191 2  and  1913,  the  purchases 
for  1 91 3,  and  the  estimated  stock  for  the  same  periods.  This  also 
gauges  the  merchandise  purchased  in  comparison  with  the  sales, 
the  bills  on  file,  the  orders  for  the  current  month,  the  month 
ahead,  and  those  for  a  longer  period. 

Sales  form  the  background  against  which  purchases  are  built. 
Merchandise  may  be  bought  for  delivery  at  a  certain  time,  and 
may  be  countermanded  if  the  loss  in  sales  is  marked ;  or,  of  course, 
additional  purchases  may  be  made  if  the  sales  show  a  decided 
increase.  The  general  manager  must  know  each  morning  how 
far  to  go,  because  purchases  are  made  daily. 

This  daily  report  starts  with  the  sales  check,  which  is  either 
charge,  cash,  or  C.O.D.  It  matters  not  which,  for  each  must 
fulfill  its  function  in  the  total.  That  function  is  to  show  the 
charge  and  cash  business  separate  from  the  C.O.D. ,  which  is  too 
hazardous  to  rely  upon. 

Sales  checks  reach  the  auditing  department  every  hour  of  the 
day.  If  a  charge  or  C.O.D.  slip,  it  makes  a  slight  detour  by  way 
of  the  inspector,  shipping  and  credit  departments.  If  a  cash  slip, 
it  goes  direct  to  the  cashier  by  way  of  the  inspector  and  then  to 
the  auditing  department. 

The  cash  sales  check  is  sent  with  money  through  the  tubes  to 
the  cashier.  The  customer  receives  a  receipt  and  the  salesman, 
simply  as  a  protection,  gets  a  voucher  bearing  the  cashier's 
stamp. 

The  charge  check  is  authorized  by  a  representative  of  the  credit 
department  and  by  the  inspector  who  transmits  it  to  the  auditing 
department. 


SALES  AND  ADVERTISING  STATISTICS  377 

The  sales  check  clearly  states  the  purchaser  and  his  address,  the 
department  number,  the  article  bought  and  the  amount.  It  is 
essential  for  salesmen  to  make  an  accurate  record  of  each  sale. 
Failure  to  give  correct  data  often  creates  confusion  in  the  auditing 
department,  which  is  responsible  for  the  daily  summary. 

To  avoid  further  confusion,  the  salesmen  summarize  their  sales 
each  day.  These  totals  are  given  to  the  head  of  stock,  who  then 
figures  all  the  sales  in  his  department  and  turns  the  report  over 
to  the  department  buyer  or  assistant  buyer.  The  buyer  then 
forwards  it  to  the  head  bookkeeper.  He  and  the  general  manager 
alone  know  the  total  daily  sales. 

The  daily  sales  report  from  the  buyer  to  the  auditing  depart- 
ment is  confirmed  before  it  becomes  official.  The  reports  of  sales 
checks  and  the  summary  are  unofficial  because  they  are  subject 
to  correction  by  the  auditing  department.  After  corrections  are 
made,  and  any  missing  checks  or  dead  C.O.D.  slips  traced  by  the 
auditing  department,  the  report  becomes  official  and  is  ready 
to  form  its  part  in  the  final  department  report  to  the  general 
manager. 

The  department  report  is  held  until  after  the  close  of  business 
each  day  to  go  with  the  final  summary,  which  is  given  to  the 
general  manager  in  the  morning.  It  is  only  an  estimate,  for  the 
dead  C.O.D.  business,  which  often  amounts  to  a  thousand  dollars 
or  more  in  a  big  store,  will  not  appear  until  a  day  or  two  later.  It 
usually  takes  two  or  three  days  for  this  business  to  adjust  itself. 
Then  the  general  manager  gets  his  final  department  report. 

The  sales  report  by  departments  would  not  give  the  general 
manager  a  sufficient  basis  for  finding  the  cause  of  fluctuation  in 
business  and  for  ascertaining  the  net  gains,  if  a  strict  watch  were 
not  kept  on  the  current  payroll.  The  absence  of  two  salespersons 
in  this  department  or  that,  lateness  in  arrival  at  the  department, 
and  so  forth  —  these  facts  suggest  incompetency  or  inefficiency, 
and  might  handicap  the  service  to  the  extent  that  business  in  the 
end  would  show  a  heavy  decrease.  This,  of  course,  is  cared  for 
by  the  superintendent. 

Sales  reports  would  also  be  less  important  as  a  barometer  of 
trade  if  the  cost  of  doing  business  for  each  week  were  not  known. 


378  BUSINESS  STATISTICS 

Just  as  sales  fix  present  and  future  purchases,  so  does  the  cost  of 
doing  business  govern  them.  Therefore,  the  general  manager  gets 
each  Saturday  a  report  of  all  wages  and  all  sales  for  the  week. 
Each  must  have  its  own  percentage  of  fixed  expenses  and  the 
sales  must  bear  a  fixed  ratio  to  the  pay.  But  the  daily  department 
report  is  the  real  barometer  of  business.  The  daily  report  on 
department  organization  indicates  the  capacity  to  handle  busi- 
ness. The  report  on  individual  salaries  and  sales  determines  the 
cost  of  handling  it.  The  three  must  be  considered  together  in 
order  to  read  the  store's  profit. 

Forty-eight  hours  after  a  tornado,  a  Nebraska  clothier,  who 
lost  his  stock  in  a  fire  following  the  storm,  collected  his  insurance 
in  full  and  had  new  goods  on  the  way  to  the  temporary  place  of 
business  which  he  opened.  Neighboring  storekeepers  labored 
with  adjusters  for  days  before  getting  their  settlements;  in  more 
than  one  case  it  was  impossible  for  them  to  establish  their  claims 
to  anything  like  the  damage  they  thought  they  had  suffered. 

The  sales  records  of  the  fortunate  merchant  helped  to  secure 
this  quick  action  from  the  insurance  company.  Sales  records, 
although  always  maintained  by  the  larger  stores,  are  generally 
avoided  by  small  dealers  who  have  found  cost  prohibitive.  A 
solution  which  makes  them  worth  their  keep  has  been  developed 
by  a  Western  dealer  who  carries  a  $50,000  clothing  stock.  His 
system  is  simple  and  inexpensive  to  maintain.  With  the  changes 
individual  conditions  suggest  it  can  be  adapted  to  a  store  of  any 
size. 

The  plan  calls  for  daily  and  monthly  sales  records.  This 
permits  exhaustive  analysis.  Live  lines  may  be  distinguished 
from  ^'  stickers."  Inquiries  which  lead  to  better  business  are 
suggested.  Failures  may  be  picked  apart  and  successful  plans 
may  be  intelligently  followed  to  a  satisfying  conclusion.  And 
profits  put  back  into  the  business  may  be  invested  where  they  are 
certain  to  increase  and  multiply. 

Daily  sales  cards  lead  the  system  for  store  billing.  Sales  for 
the  day  are  divided  as  cash  and  credit  items  and  listed  by  depart- 
ments. Columns  are  provided  for  recording  the  cost  of  articles 
sold  either  on  cash  or  credit.   At  the  right  of  the  card,  daily  store 


SALES  AND  ADVERTISING  STATISTICS  379 

totals  are  taken.  At  the  end  of  the  month  the  totals  for  depart- 
ments are  calculated  and  recorded  at  the  bottom  of  the  card.  If 
a  weekly  balance  is  wanted,  the  sum  of  business  done  during 
that  period  is  written  in  red  in  one  of  the  spaces  left  vacant  by 
Sunday. 

Daily  totals  are  taken  from  sales  tickets.  These  are  segregated 
by  departments  as  they  are  received.  Late  in  the  afternoon,  the 
amounts  on  the  slips  received  are  added  by  the  bookkeeper.  This 
partial  list  may  then  be  completed  in  a  few  minutes  after  store 
closing.  Consequently  the  manager  has  on  his  desk  a  complete 
record  of  the  day's  business  before  he  starts  home  for  the  night. 
Or  he  can  leave  it  to  be  analyzed  in  the  first  fresh  hour  of  the 
morning,  as  he  chooses. 

Careful  scrutiny  of  this  card  is  one  of  his  most  important  tasks. 
Falling  off  of  business  in  one  department  may  prompt  him  to  the 
invention  of  new  sales  plans.  Rush  of  business  in  another  depart- 
ment may  act  as  a  reminder  to  prompt  buying.  The  effect  of 
business  changes  may  be  shown  in  another  column.  The  day's 
work  may  be  reviewed  in  the  light  of  past  performance.  In  all,  the 
card  is  practically  a  daily  written  report  from  department  heads. 

In  the  form,  a  column  for  returned  goods  is  omitted  as  it  is 
the  custom  to  deduct  the  sales  value  of  goods  returned  from  each 
department's  total  on  the  day's  business.  If  such  a  plan  is  insuf- 
ficient, a  fourth  column  may  be  added  alongside  the  charge  sales 
under  each  department  heading  for  handling  returns. 

Other  features  which  may  be  added  to  the  sales  card  with  effect 
are  advertising  and  weather  columns.  The  advertising  column 
shows  the  space  and  the  mediums  used  for  the  day.  These  facts 
are  useful  in  checking  up  the  efficiency  of  advertising  and  assist 
the  manager  in  analyzing  and  comparing  past  sales  records.  The 
weather  column  has  a  similar  purpose.  The  letter  "  R  "  for  rain 
serves  without  further  analysis  to  explain  the  poor  sales  on  a  day 
which  ought  to  have  shown  a  good  average  of  returns. 

At  the  end  of  the  month,  the  totals  of  the  daily  sales  cards  are 
transferred  to  the  monthly  sales  sheet.  This  is  the  basic  record 
of  the  storekeeper  who  operates  on  a  knowledge  of  past  perform- 
ances.   In  making  it  up,  the  total  sales,  cash  and  credit,  for  each 


380  BUSINESS  STATISTICS 

department  are  carefully  forwarded.  Total  costs  are  noted  in  the 
proper  column,  and  from  this  data  percentages  are  figured  and  a 
gross  profit  and  per  cent  of  gross  profit  obtained.  Then  expenses 
for  the  month  are  taken  from  the  expense  sheets  and  net  profit 
and  per  cent  of  net  profit  for  the  month  figured.  At  the  end  of 
the  season  or  the  half-year,  figures  for  the  period  are  totaled  in 
the  column  at  the  right. 

With  slight  alterations,  the  system  outlined  may  be  applied  to 
smaller  stores.  For  dealers  carrying  a  stock  of  $10,000  or  less, 
the  permanent  daily  sales  summary  can  be  filled  in  according  to 
the  goods  sold.  Subdivisions  of  stock  take  the  place  of  depart- 
ments. In  addition,  the  daily  sheet  with  the  day  of  the  month 
given,  but  omitting  the  horizontal  rulings,  must  be  kept.  This 
remains  at  the  cash  register  and  clerks  enter  sales  on  it  as  they 
make  them.  At  the  close  of  the  day  the  figures  are  totaled  and 
carried  to  the  permanent  daily  record.  The  monthly  sales  record 
is  similar  to  the  form  used  by  the  larger  stores.  Departments, 
however,  are  omitted  and  sales  are  listed  on  the  permanent  daily 
record. 

An  Eastern  retailer  uses  a  system  for  recording  sales  which  can 
be  adapted  to  small  store  needs  and  also  dovetailed  into  short- 
cut bookkeeping  plans.  When  a  sale  is  made,  his  clerk  detaches 
the  stub  of  the  price  ticket  and  places  it  in  a  box  provided  for  that 
purpose.  Every  morning  these  stubs  are  collected  and  the 
number  of  sales  marked  in  the  proper  columns  on  the  card  index. 

The  clerk  enters  the  cost,  selling  price  and  lot  number  on  the 
sales  ticket,  so  it  is  a  simple  matter  for  the  bookkeeper  to  follow 
in  dollars  the  number  of  sales  shown  on  the  card  index.  Figures 
on  the  sales  slips  are  carried  to  a  combined  cash  book  and  journal 
and  the  totals  are  used  in  securing  each  day  the  daily  gross 
profits.  These  daily  totals  are  then  transferred  to  monthly 
sheets.  Charges  and  C.O.D.  items  are  posted  directly  from  a 
daily  sales  sheet  to  the  journal,  which  carries  columns  for  general 
accoimts,  customers'  accounts  and  creditors'  accounts.  To  save 
the  bookkeeper  the  trouble  of  re-entering  the  individual  items 
posted  from  the  daily  sales  sheet,  only  the  totals  of  these  columns 
are  transferred  to  ledger  accounts. 


SALES  AND  ADVERTISING  STATISTICS  38 1 

The  journal  is  ruled  to  economize  work.  The  descriptive 
spaces  are  in  the  center,  and  to  the  left  are  columns  which  care  for 
items  to  be  posted  to  the  general  ledger.  Green  lines  divide  the 
debits  from  the  credits;  faint  red  and  blue  lines  across  the  sheet 
enable  the  bookkeeper  quickly  to  follow  and  locate  place  and  line. 

This  division  of  the  ledger  entries  into  three  parts  affords  a  daily- 
showing  of  amounts  due  on  accounts  payable  (credit  balance 
of  creditors'  ledger  column),  and  amounts  due  on  accounts 
receivable  (debit  balance  of  customers'  accoimts). 

The  debit  balance  of  the  cash  column  shows  the  cash  balance 
in  the  house  and  in  the  bank,  the  balance  of  the  latter  item  being 
carried  on  the  check  stub  as  cash.  The  separation  of  merchan- 
dise purchases  and  sales  is  carried  to  avoid  the  too  common  error 
of  padding  sales  with  merchandise  returned  to  manufacturers, 
which,  in  the  case  of  large  items,  is  enough  to  disturb  percentage 
calculations  on  profits  and  expenses. 

The  retailer  who  uses  such  a  system  need  not  depend  upon  the 
word  of  his  assistants,  or  upon  his  memory,  for  details  in  any 
section  or  department.  He  has  at  hand,  when  he  needs  it,  an 
up-to-the-hour  picture  of  his  store.  Variations  continually  sug- 
gest themselves.  The  system  is  flexible  enough  to  meet  all 
conditions  and  is  limited  only  by  the  ingenuity  of  the  user. 

XXX.  Keeping  Tab  on  Sales  and  Profits  ^ 
By  W.  J.  Mullin 

A  Minnesota  hardware  dealer  had  just  finished  taking  his  annual 
inventory.  After  totaling  the  figures  and  casting  up  his  liabilities, 
he  found  he  had  just  about  broken  even  on  the  year's  business, 
instead  of  having  the  surplus  which  he  had  expected  in  view  of  the 
good  trade  experienced  right  along.  He  had  started  some  years 
before,  and  had  succeeded  fairly  well  during  the  period  when  his 
business  was  small  enough  to  be  handled  by  himself  and  one  clerk. 
As  the  town  grew  from  a  straggling  village  to  a  fair-sized  city, 
however,  competition,  keeping  pace  with  this  growth,  had 
resulted  in  a  considerable  lowering  of  the  margin  of  profit.    Sales 

^  System,  September,  1913,  pp.  290-293.  Reprinted  by  pennission  of  System. 
Illustrations  of  forms  are  omitted. 


382  BUSINESS  STATISTICS 

had  increased  tremendously;  the  annual  volume  ran  over  eighty 
thousand  dollars. 

The  owner  knew  he  was  a  fair  manager,  a  good  buyer,  and  while 
he  had  never  taken  the  time  or  trouble  to  analyze  his  store  prob- 
lems closely,  he  had  consoled  himself  with  the  thought  that 
though  he  was  selling  on  a  close  margin,  the  volume  of  trade  was 
certainly  making  him  money.  To  handle  his  increased  business 
meant,  of  course,  that  expenses  of  all  kinds  had  risen  propor- 
tionately. While  conservative,  he  made  the  mistake,  so  common 
among  retailers,  of  not  establishing  a  proper  ratio  between  expense 
per  cent  and  profit  per  cent.  His  last  three  inventories  had  not 
been  satisfactory,  but  he  had  been  able  to  cite  various  reasons  to 
account  for  his  poor  showings.  The  inventory  just  taken,  how- 
ever, brought  him  to  realize  that  a  change  must  be  made  in  the  store 
if  he  was  to  keep  it  from  going  into  the  sheriff's  charge.  He  must 
discover  what  was  wrong,  and  remedy  the  faults  without  delay. 

Taldng  counsel  with  the  owner  of  a  successful  manufacturiag 
business  —  a  thoroughly  live  man  and  a  close  friend  —  he 
explained  his  situation  and  asked  his  advice.  His  friend  had  a 
keen  sense  of  analysis,  and,  after  looking  over  the  books  and 
stock,  and  asking  a  good  many  questions,  he  decided  that  the 
sales  were  either  carrying  a  too  heavy  percentage  of  small  profit 
lines,  or  that  the  general  mark-up  on  stock  -v^as  too  low  to  make  up 
for  the  expense  incurred.  Pointing  this  condition  out,  he  advised 
putting  in  a  record  of  sales  and  expenses  by  departments  which 
would  reveal  the  source  of  weakness. 

A  daily  sales  sheet  was  the  first  step  in  this  direction.  Six 
general  classifications  of  the  store's  merchandise  were  made, 
which  could  later  be  amplified  if  more  lines  were  added,  or  if  it 
were  at  any  time  desirable  further  to  divide  the  lines  making  up 
the  six  column  headings.  This  latter  contingency  was  not  antici- 
pated, however,  as  the  schedule  provided  a  fair  separation  of  the 
goods  in  arriving  at  a  comparison  of  sales,  costs  and  profits  for  a 
store  of  this  size. 

It  was  also  decided  to  add  a  column  for  the  repair  shop  which 
was  run  in  connection  with  the  store  —  charging  it  with  all 
materials  and  labor,  and  crediting  it  with  the  proceeds  in  sales. 


SALES  AND  ADVERTISING  STATISTICS  383 

Sales  tickets  were  put  into  use  both  for  charge  and  cash  sales, 
and,  as  items  were  put  down  on  the  sales  slip  by  the  clerk,  he  also 
entered  the  cost  in  cipher  from  the  price  ticket  attached  to  the 
article.  Each  morning  the  totals  of  both  charge  and  cash  sales 
were  first  cast  up  and  entered  in  the  column  of  total  sales  for  the 
day.  The  costs  were  also  totaled  from  the  sales  slips.  The  items 
were  then  thrown  into  the  six  general  classifications  of  the  store's 
merchandise,  after  which  the  amounts  of  sales  and  costs  of  each 
were  set  down  imder  their  respective  headings  on  the  daily  sales 
sheet.  This  daily  sales  recapitulation  looked  good  from  the  day 
it  was  started.  As  a  natural  sequence,  the  merchant  soon  found 
it  advantageous  to  cast  up  his  department  sales  and  costs  and  the 
totals  of  his  cash  and  credit  sales  at  the  end  of  each  week  in  the 
blank  date  lines  falling  on  Sundays.  For  the  first  time  in  his 
experience,  the  owner  began  to  see  what  each  department  or 
general  line  in  his  store  was  doing  day  by  day  and  week  by  week. 
Naturally  he  began  to  make  comparisons,  and  in  turn  began  to 
see  the  need  for  further  records  which  would  siunmarize  results 
by  months. 

A  monthly  sales  record  was  the  outcome.  This  provided  for 
entry  of  the  totals  of  daily  sales  and  costs  of  the  different  classes. 
Entry  of  gross  amounts  of  charge  and  cash  sales  was  carried 
merely  as  a  memorandum  on  this  monthly  sheet  —  the  segre- 
gation by  departments  not  being  of  sufficient  importance  to 
warrant  special  columns  by  classes,  either  on  this  or  the  daily 
record.  This  was  also  true  of  returned  goods,  these  not  affect- 
ing the  sales  to  an  extent  warranting  their  being  a  factor,  as 
returned  goods  were  principally  exchanges,  and  entry  on  the 
stock  record  was  usually  sufficient.  Having  arrived  at  this  point, 
rough  figures  could  be  struck  showing  ratios  of  costs  and  profits  as 
between  the  general  lines  sold. 

It  was  next  necessary  to  analyze  the  various  expense  items  in 
conducting  the  business,  so  that  the  resulting  figures  could  show 
their  related  per  cent  basis  to  that  of  the  profits  realized  from  the 
goods  sold.  A  daily  expense  sheet  was  adopted,  therefore. 
Regardless  of  the  fixed  expenses,  which  were  entered  in  the 
ledger,  it  was  determined  that  for  purposes  of  daily  comparison. 


384  BUSINESS  STATISTICS 

every  outlay,  whether  for  salaries,  express,  postage  or  other 
expenses,  would  be  grouped  and  set  down  in  the  proper  column 
daily.  Logically,  a  monthly  expense  summary  followed  the 
daily  record.  At  the  end  of  the  month  the  sum  of  the  various 
amounts  paid  out  for  daily  expenses  was  set  opposite  the  classi- 
fications on  the  monthly  sheet. 

Footing  of  the  total  of  all  expenses  was  then  transferred  to  the 
monthly  sales  and  recapitulation  sheet,  and  set  down  with  the 
other  recapitulation  items  in  the  lower  part  of  the  sheet.  Per- 
centages of  gross  profit,  expenses  and  net  profit  were  figured, 
the  resultant  percentages  showing  comparisons  on  the  business  as 
a  whole  from  month  to  month.  The  percentages  as  arrived  at  for 
the  whole  store  were  also  applied  to  each  of  the  six  general  classes 
of  goods;  these  latter  percentages  being  entered  each  month,  in 
red  ink,  to  the  right  of  the  segregated  amounts. 

A  few  months'  use  sufiiced  to  show  that  the  builder's  hardware 
line,  which  had  been  coimted  a  mainstay  of  the  business,  was  not 
earning  money;  competition  in  bidding  resulted  in  such  low 
prices  that  this  one  line  alone  was  lowering  the  profit  percentage 
all  over  the  store.  When  this  became  clear  it  was  determined  to 
&S.  prices  in  this  department  which  in  the  future  would  bring  the 
proper  margin,  or  allow  the  other  fellow  to  take  the  business. 

Another  discovery,  made  during  the  ensuing  months,  was  that 
certain  improfitable  staples  were  being  pushed  by  the  clerks  at  the 
sacrifice  of  sales  on  highly  profitable  specialties.  To  correct  this 
tendency,  the  men  were  told  that  individual  sales  records  would 
be  kept  in  future  and  that  the  value  of  a  man's  sales  would  be 
reckoned  from  a  profit-making  standpoint  rather  than  from  large 
gross  sales  which  carried  too  many  staples.  This  resulted  in  the 
men  taking  more  interest  in  the  goods  which  required  pushing, 
and  while  it  meant  some  little  falling  off  in  the  totals  of  individual 
sales  for  a  time,  the  profit  results  were  so  satisfactory  that  the 
owner  was  content. 

Going  still  further  into  details  about  the  goods  making  up  his 
stock,  with  the  idea  of  ehminating  unprofitable  articles,  as  well 
as  of  securing  an  intelligent  record  of  past  sales  as  a  guide  to 
future  purchases  (also  to  afford  protection  against  loss  by  fire 


SALES  AND  ADVERTISING  STATISTICS  385 

and  theft),  the  hardware  man  determined  to  put  in  a  perpetual 
stock  record. 

As  the  filling  out  of  this  record  in  full  detail  meant  considerable 
work,  the  card  was  designed  to  account  for  only  full  packages  of 
the  numerous  small  items  carried  and  sold  every  day  —  nails, 
screws,  hinges  and  the  like.  For  statistical  purposes  it  was 
enough  if  the  original  packages  were  charged  off  the  stock  record 
immediately  on  being  opened. 

Larger  articles,  however,  which  meant  heavy  investment  and 
demanded  careful  watching,  such  as  tools,  cutlery,  paints, 
brushes,  household  utensils  and  other  important  articles  making 
up  the  stock,  were  given  cards  which  took  care  of  both  open  and 
reserve  stock.  Certaiu  articles  which  moved  rapidly  were  given 
cards  for  each  size,  while  in  other  cases  one  card  showed  the 
record  for  several  sizes  or  descriptions  —  the  column  headings 
being  so  arranged  that  entries  could  be  made  either  from  top  to 
bottom  of  card,  or  from  left  to  right,  according  to  the  nature  of  the 
goods.  Goods  received  were  debited  to  the  stock  cards  from  the 
checked  invoices,  and  credits  for  articles  sold  were  entered  from 
the  daily  sales  tickets  for  the  larger  goods.  Where  bulk  was 
broken,  as  in  the  case  of  the  small  stuff,  a  printed  stock  slip  was 
made  out  and  sent  to  the  office,  which  was  used  to  credit  the  stock. 

In  buying  alone  the  stock  record  became  almost  as  much  a 
factor  in  the  economy  of  the  business  as  were  the  statistical 
records  on  sales  and  expenses,  for  the  cards,  with  their  graphic 
record  of  the  movement  of  goods,  saved  many  a  dollar  in  invest- 
ment over  the  old  haphazard  days  of  memory  and  faith  buying. 

After  a  year's  use  of  his  new  records,  the  dealer  agaiQ  cast  up 
results,  and  verified  the  story  told  him  by  the  daily  and  monthly 
accounts  he  had  maintained.  The  actual  inventory  taken,  when 
compared  with  the  perpetual  stock  record,  showed  a  variation 
astonishingly  low. 

The  net  value  of  the  stock  in  dollars  and  cents,  as  related  to  the 
more  or  less  theoretical  sales  and  profit  figures  carried  on  the 
statistical  record,  was  highly  satisfactory.  The  net  profit 
percentage  had  steadily  risen,  while  the  expense  percentage  had 
not  kept  pace. 


386  BUSINESS  STATISTICS 

This  guiding  chart  had  pointed  out  the  way  to  future  prosperity. 
The  merchant  learned  that  to  discover  the  difference  between 
profit  ratio  and  expense  ratio  another  factor  than  the  mere 
watchfuhiess  over  general  outgo  and  income  was  necessary;  the 
vital  problem  is  analysis. 

XXXI.  The  Danger  Zone  in  Store  Keeping  ^ 

By  W.  S.  Zimmerman 

"  Take  a  $200  mark-down  on  that  gold  bag;  reduce  this  bracelet 
$20.'^  In  the  half -darkness  which  follows  the  closing  hour  on 
short  winter  days,  the  head  of  one  of  the  largest  specialty  stores 
in  this  country  walked  by  the  counters  of  his  jewelry  department 
and  directed  new  price  levels  that  fell  below  cost.  A  group  of 
buyers,  following  him  by  a  few  steps,  noted  with  consternation 
the  very  radical  reductions  ordered  by  the  head  of  the  house. 

"  This  jewelry  department  is  thousands  of  dollars  over- 
bought,'' the  merchant  continued  at  the  last  counter.  "It  is  a 
small  retail  store  which  has  been  mismanaged.  The  crudest  of 
storekeeping  blunders  have  been  made.  Only  the  fact  that  it 
happens  to  be  under  our  roof  keeps  it  solvent.  Aroimd  the  corner 
Brown  or  Smith  would  have  failed  miserably  with  it. 

"  On  looking  at  things  closely,  I  find  that  the  initial  mark-up  is 
small  for  jewelry.  Since  the  stock-turn  is  low  with  jewelry,  we 
must  cover  some  of  the  interest  on  the  capital  tied  up  here  through 
an  initial  mark-up  which  is  more  liberal  than  usual.  Some 
novelty  lines  we  can  mark  up  100  per  cent  or  more.  The  general 
run  should  not  fall  below  50  per  cent. 

"  The  salesforce  is  costing  nearly  20  per  cent  of  the  sales,  which 
is  far  too  high.  We  must  locate  the  best  salespeople  and  speed 
them  up  until  their  wages  are  under  7  per  cent  of  their  individual 
sales.  Then  the  slower  sellers  should  be  weeded  out  until  the 
department's  monthly  payroll  for  salespeople  is  only  7  or  8  per 
cent  of  the  jewelry  sales  for  the  average  month. 

"  The  turnover  has  not  been  over  one  or  two  —  far  below  what 
we  must  have.    Jewelry  turns  slowly,  and  a  good  deal  of  staple 

*  System,  July,  1913,  pp.  60-64.    Reprinted  by  permission  of  System. 


SALES  AND  ADVERTISING  STATISTICS  387 

Stock  must  be  carried  the  year  round.  But  here  in  the  store,  we 
should  carry  only  enough  staple  stock  to  give  ^  tone '  and  meet 
current  demands  upon  stock,  and  must  put  most  of  our  selling 
effort  on  popular  priced,  quick  turning  specials.  In  this  way,  we 
can  drive  the  turnover  up  to  five  or  six  times  a  year. 

*'  I  shall  also  stop  all  orders  —  no  more  stock  is  to  come  into  the 
department  until  it  is  in  a  normal  condition.  Above  all,  in  the 
future,  estimates  of  jewelry  sales  are  to  be  carefully  analyzed. 
By  this  analysis  you  will  find  that  a  fairly  constant  percentage  of 
the  year's  jewelry  sales  falls  in  each  month.  For  instance,  June 
with  its  weddings  will  carry  a  high  percentage  of  the  annual  sales. 
So  will  December,  the  gift  month.  Once  you  have  these  averages, 
fix  on  a  conservative  volume  for  a  year  ahead  and  take  out  the 
percentages  of  the  months  that  face  you.  Subtract  these  esti- 
mated sales  from  your  stock  on  hand.  Then  buy  according  to 
the  result. 

"  Now,  IVe  read  you  fellows  quite  a  lecture,"  laughed  the  mer- 
chant. "  What  I  have  said  merely  sums  up  the  elements  of  good 
retailing.  This  store  is  just  a  collection  of  small  stores  under  one 
roof  and  you  must  take  into  account  all  the  points  which  the 
small-town  jeweler  would  have  to  manage  for  himself." 

This  retailer  has  four  thousand  people  on  his  pa)n*oll.  He  has 
established  over  a  hundred  little  stores  in  the  circle  of  his  big 
organization.  Still  he  says  his  problems  and  blunders  are  those 
of  the  smaller  retailer.  Furthermore,  he  adds  that  his  experience 
in  selling  not  far  from  a  million  dollars'  worth  of  stock  a  month 
shows  that  these  blunders  can  be  avoided,  and  tells  you  how. 

The  buyer  for  this  jewelry  department,  it  later  developed,  was 
in  a  situation  exactly  like  that  of  the  country  merchant  who 
finally  woke  up  and  found  that  he  had  been  too  busy  to  make 
money  —  three-fourths  of  his  work  could  be  done  by  a  five-doUar- 
a-week  boy.  The  buyer  had  spent  his  days  working  out  price 
ciphers  and  persuading  manufacturers  to  create  branded  lines  for 
his  department.  Instead,  he  should  have  estimated  with  care  his 
probable  sales,  made  sure  that  his  expenses  were  reasonable,  and 
planned  for  a  profit-making  stock-turn.  Both  the  city  buyer  and 
the  country  retailer  had  been  grappling  with  detail  and  had  never 


388  BUSINESS  STATISTICS 

disentangled  themselves  far  enough  to  size  up  correctly  the  things 
that  really  counted  for  progress  and  profits  in  their  businesses. 

Dead  stock  is  a  difficulty  by  no  means  peculiar  to  city  stores. 
A  Southerner  had  a  few  thousand  dollars  he  wished  to  keep  busy. 
He  started  a  retail  store  and  put  a  man  in  charge  to  "  keep 
shop." 

A  year  or  so  later  a  chance  to  sell  out  came,  even  though  the 
store  had  not  been  making  a  great  deal  of  money.  The  pur- 
chaser wanted  an  inventory  taken.  The  man  who  had  been 
"keeping  shop"  for  the  Southerner  "guessed  there  was  some 
ten  thousand  dollars'  worth  of  stock  on  hand." 

The  actual  inventory,  the  first  in  the  history  of  the  store, 
showed  a  stock  on  hand  worth  over  seventeen  thousand  dollars. 
Seven  thousand  dollars  had  been  buried  on  the  shelves  —  just  as 
thoroughly  as  if  at  the  bottom  of  a  well.  Modem  stock  methods 
would  have  made  the  neglect  of  these  goods  impossible  for  more 
than  a  few  months.  Quick  turnovers  are  only  possible  to  retailers 
who  know  by  effective  records  and  correct  stockkeeping  methods 
the  amount  of  goods  normally  demanded  by  their  trade  and  the 
quantity  on  the  shelves  or  in  storage. 

Analytic  stock  records  not  only  automatically  check  stock  and 
watch  the  mark-up,  but  usually  also  uncover  valuable  information 
regarding  the  best  selling  lines.  If  cards  are  ruled  for  each  line 
of  goods  and  every  price  noted  for  all  items  within  the  full  lines, 
a  girl  can  keep  on  them  stock  records  which  indicate  the  popular 
goods.  The  cards  should  separate  the  lines  into  departments  and 
show  daily  receipts  and  sales  of  stock.  The  retailer  who,  by  this 
economical  system,  can  place  his  finger  on  his  best  selling  line 
knows  how  to  display  and  push  and  renew  his  stock  to  the  very 
best  advantage. 

The  credit  man  for  a  wholesale  house  stepped  into  the  shop  of  a 
small  Western  retailer,  under  orders  to  investigate  the  little 
store's  stock.  He  found  goods  on  the  shelves  which  his  house  no 
longer  handled.  The  merchant  was  evidently  at  sea  regarding  his 
best  selling  lines. 

"  I'll  bet  you  half  your  store  that  50  per  cent  of  your  sales 
and  75  per  cent  of  your  profits  are  made  on  items  you  have 


SALES  AND  ADVERTISING  STATISTICS  389 

marked  at  fifty  cents  or  under,"  the  credit  man  finally  said.  He 
spoke  from  experience  with  the  troubles  of  hundreds  of  small 
retail  stores.  "  You're  wrong/'  replied  the  merchant,  "  fifty 
cent  lines  do  not  give  me  half  my  volume.  My  big  trade  is  in 
women's  garments."  The  credit  man  took  three  days  to  investi- 
gate. He  sorted  the  sales  for  a  month  by  prices  and  in  the  end 
convinced  the  retailer  that  about  40  per  cent  of  them  were  around 
half  a  dollar  each.  He  next  showed  that,  with  proper  buying, 
these  sales  alone  could  yield  more  than  three-fourths  of  the  store's 
profit. 

The  merchant  took  the  information  to  heart.  He  installed 
duplicate  sales  slips  as  a  check  on  the  lines  which  turned  quickly. 
He  remodeled  his  store  on  a  basis  of  small  departments  and 
specialized  on  those  low  priced  lines  which  paid  immediate 
profits.  Working  out  the  gains  on  individual  lines  enabled  him 
to  shift  the  departments  which  were  losing  money  to  more  favor- 
able locations  in  the  store,  or  to  discontinue  them  entirely  without 
misgivings.  He  could  also  advertise  departments  with  direct  con- 
sideration of  the  possible  profit  in  mind.  At  least  he  knew  his 
business.  Today  he  reckons  a  month's  gross  profits  in  figures 
which  formerly  would  have  seemed  a  satisfactory  yearly  record. 

A  student  of  retail  methods  with  a  liking  for  statistics  has  stated 
that  three  retailers  in  every  four  figure  their  profits  inaccurately. 
They  mark  up  by  taking  a  percentage  of  their  cost  equal  to  the 
desired  gross  profit,  instead  of  working  back  from  a  selling  price. 

Launching  out  into  business,  a  young  accountant  ran  into  this 
error.  He  bought  a  half  interest  in  a  Pennsylvania  retail  store 
which  showed  satisfactory  profits  on  paper.  But  when  he  went 
over  costs  and  mark-ups  with  his  partaer,  he  discovered  that  most 
of  the  profits  were  imaginary. 

His  training  enabled  him  to  trace  down  the  difficulty.  He 
foimd  that  the  dangerous  trouble  lay  in  his  partner's  system  of 
estimating  the  cost  of  doing  business  as  a  certain  percentage  of 
the  sales  and  then  adding  this  percentage  to  the  cost  price  when 
figuring  for  the  selling  basis  on  individual  lines.  The  minute  the 
new  member  of  the  firm  used  the  desired  selling  figures  as  a 
starting  point  in  marking,  the  business  showed  healthy  profits. 


390  BUSINESS  STATISTICS 

The  accountant  correctly  secured  his  gross  profit  (expenses 
were  20  per  cent  and  the  net  profit  desired  10  per  cent)  on  an  item 
costing  ten  dollars,  by  treating  the  selling  price  as  100  per  cent 
and  working  the  problem  out  as  follows:  — 

Selling  price,  always  taken  as 100% 

Cost  to  do  business 20% 

Net  profit  desired 10%  30% 

Cost,  $10  equals  70%  of  selling  price 

Dividing  the  cost,  $10,  by  .70,  gave  him  the  correct  selKng 
price:  $14.28. 

The  partner  had  been  incorrectly  marking  the  same  article  at 
$13,  or  $1.28  below  the  gross  profit  he  thought  he  was  providing 
for,  by  calculating  his  selling  price  in  this  way:  — 

20%  of  $10  for  cost  to  do  business $2.00 

10%  of  $10  for  net i.oo 

Gross  profit $3.00 

Cost 10.00 

Selling  price $13.00 

He  figured  his  30  per  cent  gross  profit  on  the  cost  price,  instead 
of  on  his  desired  selling  price.  But  the  cost  was  only  70  per  cent 
of  the  selling  price,  which  must  always  be  taken  as  100  per  cent. 
Thirty  per  cent  of  70  per  cent  gives  21  per  cent,  which  is  there- 
fore the  gross  profit  he  actually  secured.  But  he  thought  he  was 
getting  30  per  cent.  Seventy  per  cent,  his  cost,  plus  21  per  cent, 
his  actual  gross  profit,  is  91  per  cent,  which  is  the  percentage  of 
the  desired  selling  price  he  believed  he  was  putting  on  his  mer- 
chandise. Actually  he  was  barely  "  making  both  ends  meet  '^ 
because  of  his  incorrect  method  of  mark-up. 

XXXII.  More  Turnovers  * 

By  Wheeler  Sammons 

Rapid  turnovers  are  today  securing  the  trade  of  a  new  five-story 
department  store  in  a  small  Indiana  city  for  a  less  pretentious 
shop  diagonally  across  the  street.     Its  quick  turns  allow  the 

^  System,  March,  1914,  pp.  326-329.  Reprinted  by  permission  of  System. 
Illustrations  of  charts  are  omitted. 


i 


SALES  AND  ADVERTISING  STATISTICS  39 1 

smaller  store,  which  is  run  by  three  brothers  still  in  their  thirties, 
to  make  money  on  margins  so  narrow  that  it  repeatedly  cuts  under 
the  prices  set  by  the  big  rivars  slow  turnovers.  The  owners  of 
the  larger  store,  who  bought  their  first  stock  in  1850,  know  bank- 
ruptcy is  ahead  if  rising  costs  continue  to  mount  into  their 
dwindling  profits.  Bewildered  for  the  first  time  in  sixty  years, 
they  are  fighting  to  save  their  sinking  business.  They  have  put 
in  an  accurate  cost-keeping  system,  purchased  new  fixtures,  and 
advertised  heavily,  still  each  January  of  the  last  three  years  has 
seen  them  meet  deficits  by  reducing  the  savings  set  aside  for  their 
families. 

The  young  brothers,  also  faced  by  rising  costs,  clearly  imder- 
stand  why  they  are  winning  —  they  divide  the  high  costs  over 
many  turns,  a  remedy  for  diminishing  profits  perfected  since  their 
older  rivals  learned  to  merchandise.  These  figures,  which  System 
took  from  the  books  of  the  two  stores  during  last  October, 
epitomize  the  situation:  average  stock,  at  cost,  in  the  three 
brothers'  ready-to-wear  section,  which  sells  annually  clothes 
worth  about  $145,670  at  wholesale,  $14,481 ;  corresponding  facts 
from  the  big  store  —  sales,  $125,820;  stock,  $24,899.  Since  they 
are  securing  twice  as  many  turnovers,  the  brothers  make  money 
on  mark-ups  which  would  not  pay  the  larger  store  a  cent. 

"  Quick  sales  at  small  profits  is  the  modern  idea,"  the  elder  of 
these  three  brothers  says.  "  My  brothers  and  I  got  our  training 
under  one  of  the  most  successful  merchants  in  New  England. 
Then  we  came  West  to  try  out  his  methods.  We  picked  this  city 
because  the  heaviest  competition  is  controlled  by  two  elderly  men 
who  learned  the  business  in  the  days  when  the  jobbers  regularly 
gave  six  months'  credit,  and  the  retailers  four  or  six.  Theirs  is  the 
old  idea  —  selling  slow,  at  a  good  profit.  We  have  in  mind  the 
Greek  banana  man  who  puts  his  money  into  fruit  in  the  morning 
and  has  it  back  again  by  night,  plus  2  or  3  per  cent  net  profit.  He 
makes  over  600  per  cent  on  his  capital  annually,  if  he  is  out  every 
working  day. 

"  We  succeed  in  turning  our  money  seven  times  a  year  now. 
I  don't  believe  our  rivals  do  better  than  three.  We  are  quite 
satisfied  with  5  per  cent  net  on  a  turn  —  or  35  on  our  investment 


392  BUSINESS  STATISTICS 

in  stock.  They  have  to  net  over  1 1  per  cent  in  order  to  equal  our 
showing  at  the  end  of  the  year.  We  believe  that  it  is  better  to  get 
three  sales  at  5  per  cent  net,  as  long  as  you  cover  your  costs,  than 
it  is  to  make  one  at  10.  We  build  our  big  profit  from  a  number  of 
little  profits  —  I  think  it's  somewhat  like  carrying  into  mer- 
chandising a  saying  of  Franklin's  which  father  made  me  learn 
by  heart:  *  Five  shillings  turned  is  six,  turned  again  is  seven  and 
three  pence,  and  so  on  till  it  becomes  a  hundred  pounds.'  " 

These  ideas  and  methods  are  not  uniquer  In  practically  every 
city  and  town  some  retailer  or  wholesaler  is  using  them  to  over- 
come competition  and  master  rising  costs.  In  Logansport, 
Indiana,  for  example,  H.  S.  Seyboid  of  the  Seyboid  Dry  Goods 
Company  cut  $5,000  from  his  linoleum  inventory  and  handled 
more  sales.  In  Columbus,  Indiana,  A.  R.  Rosenbush  reduced 
his  hat  stock  over  $800  and  satisfactorily  cared  for  his  usual 
trade.  Numerous  like  instances  show  that  shrewd  merchandising 
on  small  stocks  is  enabling  distributors  to  pay  rising  costs 
profitably. 

In  much  the  same  manner  automatic  machinery,  new  office 
appliances  and  scientific  management  have  helped  manufacturers 
and  office  men  turn  their  capital  quicker.  When  management 
finds  a  better  way  for  handling  men,  money  invested  in  wages 
5H[elds  higher  returns;  when  an  inventor  perfects  an  office  appli- 
ance that  shortens  tasks,  again  capital  may  be  placed  more 
advantageously;  and  when  an  automatic  machine  cuts  factory 
work,  the  money  spent  for  it  gives  larger  dividends  than  resulted 
before  the  invention.  More  turnovers  come  from  these  advances, 
bringing  new  profits  for  meeting  rising  costs.  Net  gains  never- 
theless diminish  in  many  industries  because  costs  increase  faster 
than  the  gross  profits.  Of  course,  the  large  sales  volumes  of 
today,  when  they  proportionately  lessen  expenses,  also  make  it 
possible  for  manufacturers  and  distributors  to  declare  satisfac- 
tory dividends  on  lower  net  returns.  But  increasing  the  stock- 
turn,  usually  a  far  more  adaptable  means,  realizes  the  same  object 
—  higher  profits  with  no  advance  in  price. 

If,  then,  more  turnovers  is  the  business  man's  answer  to  rising 
costs,  why  have  they  been  neglected  ?    It  is  not  difficult  to 


SALES  AND  ADVERTISING  STATISTICS  393 

explain.  More  than  ordinary  knowledge  is  required  to  secure  a 
rapid  stock- turn  and  it  has  taken  time  for  merchants  to  learn. 
Some  got  the  knack  quickly  —  our  largest  department  stores, 
prospering  on  rapid  turns  at  exceedingly  narrow  profit  margins, 
resulted.  The  majority,  however,  saw  no  need  for  careful 
merchandising,  since  profits  were  long  and  costs  low.  But  the 
rise  in  costs  which  marked  the  last  ten  years  —  over  3  per  cent 
in  retail  lines  —  forced  them  either  to  learn  or  go  out  of  business. 
When  profits  were  generous,  competition  scattered,  credits  long, 
and  transportation  slow,  it  was  safe,  or  even  necessary,  to  buy  a 
year  or  six  months  ahead.  Today,  following  the  rise  in  costs, 
margins  are  not  generous  enough  to  allow  the  holding  of  profits 
on  the  shelves  in  merchandise.  The  hand-to-mouth  buying 
which  results  when  failure  is  avoided  demands  a  careful  gauging 
of  demand  and  a  comprehensive  stockkeeping  system.  Since 
these  restrictions  set  no  easy  task,  the  commercial  agencies  tell  us 
that  90  per  cent  of  the  retailers  in  America  over-buy.  Further, 
the  reports  of  retail  failures  from  the  three  causes  which  reflect 
the  severity  of  the  work  —  incompetence,  neglect  and  inexperi- 
ence—  grow  heavier:  33.3  per  cent  of  all  the  bankruptcies  in 
1911,  36.8  in  1912. 

This  situation  is  of  importance  to  all  business,  for  it  touches 
the  profits  of  every  enterprise.  The  happiness  and  prosperity 
of  the  homes  are  concerned,  since  over-the-counter  prices  must 
finally  pay  the  cost  of  disasters  in  the  factories  and  stores.  To 
improve  conditions  enough  to  overcome  the  reduction  in  net 
profits,  it  is  necessary  that  the  merchants  be  given  two  types  of 
assistance  in  their  fight  against  rising  costs  and  tightening  com- 
petition —  first,  national  standards  against  which  to  check  their 
stock-turns;  second,  tested  methods  for  speeding  turnovers. 

National  stock-turn  averages  from  over  seven  hundred  Ameri- 
can stores  have  been  figured  from  System's  investigations  to  give 
the  averages  for  the  ten  standard  types  shown  in  Table  I.  From 
the  books  of  several  hundred  stores  carrying  departmentized 
stocks  averages  for  twelve  standard  lines  were  secured  as  shown 
in  Table  II. 


394  BUSINESS  STATISTICS 

Table  I.    The  Turnovers  here  Averaged  are  for  the  Complete  Stocks 

AND  HAVE   NO  REFERENCE  TO  EITHER  THE  CHARACTER   OR  THE  NUMBER 

OF  THE  Lines  Carried 

Average  number  of  turn-  Average  number  of  turn- 

Type  of  Store        overs  secured  annually        Type  of  Store         overs  secured  annually 

Grocery lo  Hardware 3.5 

Department 7  Furniture 3 

Variety  Goods 6  Shoe 2.1 

Drug 4.5  Clothing 2 

Dry  Goods 4  Jewelry 1.5 

Table  II.    These  Average  Turnovers  are  for  Typical  Lines  and  Bear  No 

Relation  to  the  Turns  normally  Secured  through 

Complete  Store  Stocks 

Average  number  of  turn-  Average  number  of  turn- 

Line  overs  secured  annually        Line  overs  secured  annually 

Notions 9  Hosiery 4 

Corsets 8  Gloves 3.5 

Women's  ready-to-wear.  .  6  Dress  goods 3.2 

Wall  paper 4.2  Silks 3.1 

Men's  furnishings 4.2  Domestics 3 

Underwear 4.1  Carpets 1.5 

With  these  averages  to  check  against,  retailers  are  in  a  position 
to  decide  if  their  stock-turns  rank  above  or  below  the  results 
secured  in  other  stores.  Turns  are  easily  figured  by  dividing  the 
sales  for  any  period,  at  cost,  by  the  cost  of  the  average  stock  on 
hand  during  the  period.  Once  he  has  secured  turnover  and  cost 
figures  for  his  store,  it  is  not  difiicult  for  the  retailer  to  demon- 
strate the  added  profit  which  an  extra  turn  will  bring.  The  net 
gains  climb  when  the  expenses  are  cut,  the  turnovers  increased, 
the  totals  owing  from  customers  reduced,  or  the  gross  profits 
lengthened.  As  soon  as  larger  stocks  accumulate,  customers 
neglect  to  pay,  or  expenses  increase,  the  net  profits  dwindle.  To 
show  these  conditions,  it  is  only  necessary  to  express  the  cus- 
tomers' balances  and  the  stocks  as  equal  to  so  many  average 
days'  sales.  Your  sales,  at  cost,  reach  $360,000  a  year,  or  $1,000 
a  day,  let  us  suppose.  Then,  if  your  average  stock  costs  $30,000, 
it  equals  thirty  days'  sales,  and  the  total  due  from  customers, 
fifteen  days',  if  we  take  it  as  $15,000.  Also,  if  your  gross  profit  is 
25  per  cent  and  your  cost  of  doing  business  20,  the  net  profit  for 
the  period  will  equal  the  difference  between  these  two  percentages 


SALES  AND  ADVERTISING  STATISTICS  395 

divided  by  the  sum  of  the  stock  and  the  customers'  accounts  due, 
expressed  in  days,  and  multiplied  by  360.    Or,  in  figures: 
Net  profit  on  your  capital  for  the  year  = 

25  —  20 

■ — -X  360,0140%. 

30+  15 

If  the  stock  is  increased  to  a  sixty  days'  supply,  the  turnover 

lessens,  and  the  net  profit  at  once  falls: 

Net  profit  on  your  capital  for  the  year  = 

25  —  20 

— — —  X36o,or  24%. 

60 -f  15 

But  if  you  buy  closer  and  push  the  goods  on  the  shelves  down  to 
a  fifteen  days'  stock,  the  increased  turnover  carries  the  net  profit 
upward: 

Net  profit  on  your  capital  for  the  year  = 

25  —  20 

— —  X  360,  or  60%. 

Although  these  relations  of  profits  to  turnovers  are  universal, 
individual  conditions  vary  the  number  of  turns  secured  in  specific 
stores.  The  standards  given  in  this  article  therefore  require 
modification  when  local  influences  are  unusual.  The  turns 
secured  in  a  large  department  and  in  a  country  general  store  will 
differ  because  of  the  heavy  buying  power  touched  by  the  city 
store  and  its  managers'  skill.  The  turnover  averages  given  on 
the  next  page  are  from  several  large  department  stores  and  a  score 
or  more  departmentized  concerns  in  country  districts: 

There  are  variations  as  marked  in  the  number  of  turns  secured 
by  stores  selling  single  lines.  The  average  turnover  made  by  the 
groceries  investigated  was  ten,  but  before  competition  tightened, 
John  Harvey,  vice-president  of  the  Kansas  Retailers'  Association, 
handled  sales  averaging  $100  a  day  with  a  two-thousand-dollar 
stock.  Many  a  grocer  is  today  carrying  a  stock  equal  to  Mr. 
Harvey's  for  a  fifty-dollar-a-day  trade.  Again,  one  of  the  largest 
concerns  in  Boston  is  making  eighteen  turns  a  year  in  its  women's 
ready-to-wear  sections  —  a  Chicago  store  securing  an  equal 
volume  of  sales  fails  to  make  fourteen  turns  in  the  corresponding 
departments. 


396  BUSINESS  STATISTICS 

Number  of  turns  secured 
annually: 
City  depart-  Country  gen- 

Stock  ment  stores  eral  stores 

Books 4  1.5 

Candy 15  9 

Clocks 2.5  I 

Embroideries 3.5  3 

Furs 5  3 

Infants'  clothing 5  3 

Laces 4  2 

Linens 3.5  2 

Men's  hats 7  4 

Pianos 9  4 

Ribbons 6  2 

Stationery 5  2 

Umbrellas  and  canes 11  3 

Trunks 5  1.5 

Veilings 5.5  2 

Wash  goods  and  flannels 5  3.2 

Investigations  among  drug  stores  set  4.5  as  the  national  annual 
turnover  for  the  line.  Nevertheless,  there  is  one  store  in  Chicago 
which  makes  a  turnover  every  twenty  business  days,  and  another, 
a  few  blocks  down  the  same  street,  counts  seventy  days  to  a  turn. 
Naturally,  stores  in  cities  secure  quicker  turns  than  those  near 
demands  less  dense,  but  expenses  are  usually  lower  outside  of  the 
urban  sections.  Even  though  they  average  similar  variations, 
the  standards  here  given  enable  retailers  to  check  up  their  turns 
in  a  general  way  and  specifically  to  place  their  stocks  in  relations 
with  other  lines.  When  the  standards  are  studied  in  connection 
with  the  charts,  which  show  turnovers  and  costs,  it  is  possible  to 
pick  the  lines  that  should  rightfully  pay  the  heaviest  expenses. 

With  such  average  turnover  records  available,  it  is  not  difficult 
intelligently  to  try  out  methods  used  by  others  for  speeding  up 
stock-turns.  Investigation  of  the  merchandising  plans  success- 
fully used  by  merchants  in  five  states  shows  that  they  are  getting 
more  turns  in  four  ways:  locating  lines  which  move  rapidly; 
weeding  out  the  slow  lines;  setting  stock  limits;  concentrating 
purchases  with  a  few  manufacturers  or  wholesalers.  Some  of 
these  merchants  are  using  only  one  or  two  of  these  methods, 
others  all  of  them,  but  not  one  has  discovered  and  tested  a  fifth 
plan. 


SALES  AND  ADVERTISING  STATISTICS  397 

The  first  method  for  securing  more  turnovers  —  locating  the 
lines  which  turn  quickly  —  is,  according  to  one  of  the  most 
successful  merchants  in  New  England,  at  the  foundation  of  good 
merchandising.  Still  President  McGlasson  of  the  National 
Wholesale  Grocers'  Association  says  that  when  he  asks  retailers 
merely  how  much  stock  they  have,  without  reference  to  the  turns 
secured  by  lines,  many  reply,  "  Oh,  I  don't  know."  Locating  the 
fast  turning  lines  only  requires  that  stock  be  taken  frequently  and 
the  inventories  compared  with  sales  recorded  by  lines.  Once  the 
fast  turning,  profitable  lines  are  known,  they  are  pushed  and 
the  stock  on  the  shelves  cut  to  the  lowest  limit.  The  quicker 
the  stocks  in  these  lines  change,  the  more  possible  it  is  defi- 
nitely to  satisfy  customers  and  operate  on  a  small  investment. 
Manufacturers  frequently  maintain  in-stock  departments  for 
their  fast  turning  lines,  and  thereby  enable  retailers  to  buy 
day-to-day  suppUes. 

"  We  would  not  know  where  we  were  coming  out  if  we  didn't 
find  the  lines  which  turn  quickly,"  declares  a  middle- western 
retailer  who  has  made  money  out  of  hardware  for  thirty-two 
years.  "  Turnover  and  volume  are  in  a  way  more  important  than 
profit  —  the  success  of  R.  H.  Macy  and  Company  in  New  York 
proves  my  statement.  We  —  or  anybody  else,  for  that  matter  — 
could  make  money  by  selling  everything  on  the  shelves  overnight 
for  three-fourths  of  the  cost,  if  the  next  morning  we  could  buy  at 
full  price  what  we  knew  was  wanted.  The  fast  turning  lines  are 
the  wanted  lines.  If  you  know  them,  you  have  the  makings  of  a 
good  merchandiser  —  and  a  good  merchandiser  will  succeed,  even 
if  he  is  a  poor  buyer.  We  simply  keep  our  sales  and  inventories 
by  lines.  It  helps  at  inventory  time  if  the  retail  prices  are  put  on 
each  invoice." 

The  second  plan  for  increasing  turnovers  is  to  weed  out  the 
lines  which  move  slowly.  Once  the  fast  turning  stocks  are 
tabulated,  the  less  profitable  lines  immediately  become  evident. 
If  these  slow  goods  will  not  stand  heavier  mark-ups  than  the 
rapid  lines,  they  are  usually  unworthy  of  shelf  room.  Eliminating 
unprofitable  lines  overcomes  a  cause  of  retail  failure  mentioned 
by  84  per  cent  of  the  successful  merchants  reached  by  the  investi- 


398  BUSINESS  STATISTICS 

gation  in  four  states  —  carrying  too  many  lines.  There  are  many 
lines  which  do  not  turn  fast  enough  to  warrant  the  retailer's 
investment,  for  depreciation  gradually  eats  up  the  slender  profit 
margins  they  offer.  A  huge  sales  volume  might  be  built  around 
these  lines,  and  not  a  penny  of  net  profit  result.  The  stores  which 
frequently  go  under  when  all  is  apparently  prosperous  are  making 
this  type  of  sales  —  their  owners  have  not  weeded  out  the  slow 
lines. 

A  Kansas  jeweler,  who  built  a  business  given  up  by  his  father  as 
worthless  into  a  going  concern  netting  him  five  thousand  dollars 
a  year,  has  definite  views  about  this  danger  springing  from  slow 
turning  lines.  *'  If  you  don't  know  the  weak  lines,  you're  bound 
to  hold  stocks  from  season  to  season,  and  that's  the  shortest  road 
to  failure,"  he  says.  "  It's  all  very  well  to  have  a  bargain  sale  or 
call  a  job  man  or  start  a  bargain  store  under  your  uncle's  name, 
but  it  is  much  more  profitable  to  know  the  stickers  ahead  of 
time.  Then  you  can  go  easy  on  weak  lines,  or,  if  you  do  get 
caught,  it  is  possible  to  persuade  the  clerks  to  help  you  with  extra 
efforts,  before  it  is  necessary  to  take  mark-downs. 

"  Don't  stop  at  merely  knowing  the  turns  by  lines,  but  know 
the  goods.  How  many  men  who  sell  them  every  day  know  how 
clothespins  are  made  ?  Close  acquaintance  with  your  stock  will 
probably  enable  you  to  widen  your  appeal  to  customers  by  select- 
ing new  lines  —  and  to  do  so  brings  new  profits.  When  you  get 
that  sort  of  a  grip  on  your  stocks  it's  only  a  question  of  stock- 
keeping  to  weed  out  profitless  lines.  Once  you  get  the  rapid 
turning  lines  going  well,  you  will  be  in  a  position  to  aim  for  big 
gross  sales  and  less  profit  —  that  is  the  type  of  business  which 
makes  money.  I  sell  a  certain  novelty  pin,  for  instance,  from  a 
ten-dollar  stock,  by  reordering  daily.  I  don't  invest  more  than 
twenty  dollars  at  a  time  and  I  turn  it  twice  a  week  at  3  per  cent 
net  on  each  turnover.  My  friend  down  the  street  sells  at  a  20 
per  cent  net  profit  a  farm  implement  which  cost  him  one  hundred 
dollars.  It  took  him  six  months  to  make  the  sale.  Against  his 
40  per  cent  —  counting  that  he  repeats  the  sale  in  a  like  time  — 
I  make  312  per  cent  and  have  eighty  dollars  less  tied  up.  That 
eighty  I  put  into  other  fast  lines." 


SALES  AND  ADVERTISING  STATISTICS  399 

Third  among  the  tested  methods  used  by  the  merchants  work- 
ing in  four  states  for  rapid  turns  are  definite  stock  Kmits  and 
plans.  The  best  way  to  prevent  over-buying,  in  the  opinion  of 
these  merchants,  is  to  fix  the  lowest  stock  which  will  satisfy 
demand  and  then  place  orders  accordingly.  This,  again,  is  a 
stockkeeping  problem.  Sales  and  purchases  kept  by  lines  give 
turnovers.  From  several  years'  records  of  turnovers,  sales  and 
purchases  are  estimated  three,  or  even  six,  months  ahead.  A 
reasonable  increase  in  sales  is  figured  and  leeway  left  so  that 
attractive  "  snaps  "  may  be  purchased.  It  is  then  possible  to 
hold  the  stock  to  limits  fixed  by  weekly,  monthly  and  semi- 
annual reports.  The  facts  for  these  reports  are  taken  directly 
from  the  sales  slips  and  account  books. 

A  system  of  this  nature  is  maintained  in  the  store  of  every  one 
of  the  successful  merchants  whose  methods  were  recently  investi- 
gated by  System.  These  stores  have  elaborate  records,  others 
only  a  cash  book  and  a  few  cards  for  recording  sales  and  inven- 
tories. They  all,  however,  know  limits  beyond  which  it  is  unsafe 
to  buy.  This  overcomes  the  constant  temptation  to  buy  for  a 
discount,  to  let  the  stocks  grow  faster  than  the  turns,  or  to  allow 
the  buying  to  get  ahead  of  the  selling.  The  investments  in  stocks 
are  automatically  held  to  profitable  figures,  the  orders  restricted 
to  small  quantities,  and  the  fast  turning  lines  pushed.  In  these 
stores  new  stock  is  arriving  every  day  —  fresh  goods  which  the 
salesmen  like  to  handle  —  and  very  little  of  the  profit  is  on  the 
shelves. 

There  is  one  danger  in  buying  too  close,  however.  An  Iowa 
variety  store  owner,  who  averages  eight  turnovers  a  year,  men- 
tioned it  specifically,  although  the  majority  of  the  merchants  seen 
by  System's  investigators  referred  to  it.  "  Your  profits  are  in 
buying  close,"  he  said,  "  but  you  are  tempted  to  cut  down  your 
assortments,  and  that  costs  trade.  Butler  Brothers,  the  whole- 
sale house,  tell  me  that  all  of  the  failures  reported  to  them  in  my 
line  during  the  last  thirty-five  years  were  caused  either  by  too 
much  stock  or  too  few  lines.  So  we  are  between  fires.  There  is 
only  one  object,  however  ■ —  to  get  what  the  customers  want,  in 
the  quantity  they  need,  at  prices  they  are  willing  to  pay.    I  find 


400  BUSINESS  STATISTICS 

that  a  want  book  and  a  simple  perpetual  inventory  increased  the 
turns  in  one  of  my  departments  from  one  to  four  and  a  half.  I 
keep  four  daily  records  —  charge  and  cash  sales  by  departments 
or  divisions  of  merchandise;  daily  sales  by  clerks;  money  due 
from  customers ;  and  money  owed  by  me  and  my  bank  balance  — 
and  six  monthly  records  —  clerks'  wages  and  sales;  charge  and 
cash  sales  by  departments  or  divisions  of  merchandise;  net 
profits;  expenses;  inventories;  and  notes  outstanding. 

''  But,  after  all,  records  are  valueless  unless  you  learn  to  say  no, 
when  you're  properly  stocked,  to  the  type  of  salesman  who  talks 
about  sales  prospects,  loads  you  up  with  more  than  you  need,  and 
then  helps  out  your  rival  when  you  can't  buy  any  more.  My 
advice  is  to  be  as  careful  about  the  buying  as  you  were  the  first 
year  in  business  and  to  care  for  it  yourself  as  long  as  your  time  is 
not  exceedingly  valuable  doing  something  else." 

The  fourth  method  for  securing  more  turnovers  is  to  concen- 
trate the  buying  with  a  few  wholesalers  or  manufacturers.  To 
do  so  is  helpful  in  two  specific  ways.  First,  there  is  less  danger 
to  the  retailer  of  over-buying  through  dupUcation,  and  book- 
keeping troubles  are  reduced.  Second,  the  manufacturer  or 
wholesaler  is  naturally  unusually  interested  in  the  retailers  who 
buy  heavily  from  him.  Especially  in  lines  where  style  changes  are 
important,  cooperation  between  the  retailer  and  the  manufac- 
turer is  valuable  to  both.  The  style  points  which  the  manufac- 
turer is  able  to  supply  help  to  increase  over-the-counter  sales 
when  passed  on  to  the  retail  selling  forces.  Small  stores  are 
assisted  in  their  buying,  and  guarded  from  over-stocking,  by  the 
manufacturers'  or  the  wholesalers'  salesmen,  when  the  orders  are 
large.  On  the  other  hand,  most  traveling  salesmen  attempt 
to  overload  the  man  who  unnecessarily  scatters  his  buying. 
Furthermore,  the  best  *'  snaps,"  and  the  most  favorable  service, 
go  to  the  retailer  who  has  concentrated  his  buying. 

Standards  against  which  to  check  the  times  invested  capital 
should  turn  and  plans  hke  these  tested  methods  for  handling 
stocks  supply  more  turnovers  —  the  business  man's  answer  to 
mounting  costs  —  not  only  to  the  retailer,  but  to  all  business.  In 
office  and  factory  the  stocks  are  not  usually  retailed,  still  they 


SALES  AND  ADVERTISING  STATISTICS  401 

respond  to  improved  methods  for  getting  more  from  business 
investments.  Standards  for  office  work  are  being  established,  and 
turnover  averages  in  some  manufacturing  industries  are  already 
known.  Alex  Legge,  general  manager  of  the  International 
Harvester  Company,  has  called  the  attention  of  his  men  to  the 
increased  turnover  which  will  result  from  holding  down  the 
materials  on  hand,  the  goods  on  display,  and  the  credits  extended 
to  customers.  His  immense  organization  is  faced  by  increasing 
costs;  so  are  most  enterprises  —  the  effects  and  results  of  efforts 
to  meet  these  higher  expenses  will  influence  makers  and  distribu- 
tors alike.  When  the  retailer  buys  in  smaller  lots,  wholesalers 
must  ship  with  greater  frequency.  Manufacturers,  in  their  turn, 
establish  in-stock  departments  or  supply  the  jobbers  with  smaller 
units.  In  other  words,  the  broad  answer  to  rising  costs  prescribes, 
first,  strong  cooperation  between  the  makers  and  the  distributors; 
second,  an  earnest  spirit  among  enterprises  to  help  one  another 
make  money  yield  larger  returns  through  more  turnovers. 


CHAPTER  IV 

FACTORY  STATISTICS 

Introduction 

Factory  statistics,  unlike  statistics  for  the  sales  departments  of 
manufacturers  or  wholesalers,  are  concerned  with  operations 
which  are  concentrated  and  which  are  more  or  less  highly  stand- 
ardized. Effort  expended  in  manufacturing  3delds  results  which 
can  be  measured  more  exactly  and  evaluated  more  readily  than 
the  results  of  sales  efforts.  Because  of  the  greater  standardization 
of  the  tasks  and  the  concentration  of  processes,  more  detailed 
records  can  profitably  be  kept  for  the  factory  than  for  the  sales 
department  and  the  results  can  be  more  easily  supervised. 

As  in  the  sales  department,  the  factory  records  aim  to  show 
what  is  taking  place,  to  reveal  irregularities,  and  to  provide 
information  needed  for  the  formulation  of  policies.  A  distinction 
is  to  be  made  between  individual  memoranda  or  reports  and 
statistical  records.  Occasionally  a  factory  has  an  elaborate 
system  of  individual  reports  or  memoranda  for  each  piece  of  work 
done,  but  has  no  statistics.  The  absence  of  statistics  in  such  an 
instance  is  due  to  the  failure  to  provide  for  the  compilation  of 
sununaries  and  totals  from  the  individual  reports.  If  the  data 
entered  upon  the  individual  reports  are  not  tabulated  in  a  form 
which  permits  of  comparisons  being  made,  the  reports  are  not 
being  fully  utilized.  The  statistical  records  which  are  compiled 
from  the  individual  reports  may  be  of  secondary  importance,  but 
they  are  nevertheless  valuable.  It  is  the  utilization  of  these 
reports  and  records  for  statistical  purposes  in  factory  manage- 
ment with  which  we  are  concerned  in  this  chapter. 

In  discussing  these  statistical  records  here,  no  sharp  distinction 
is  drawn  between  the  different  types  of  factory  management. 
The  manner  in  which  the  statistics  will  be  utilized  and  even  the 
sort  of  records  which  will  be  kept  will  depend,  to  be  sure,  upon  the 

402 


FACTORY  STATISTICS  403 

type  of  management  —  upon  whether  or  not  there  is  a  separate 
planning  department,  for  instance.  Nevertheless  in  all  factories 
statistical  records  are  necessary  and  the  fundamental  statistical 
principles  involved  are  essentially  the  same. 

The  statistical  system  used  in  any  particular  factory  depends, 
in  the  first  place,  upon  the  nature  of  the  business  —  upon  whether 
it  is  a  continuous-process  industry  such  as  paper  manufacturing 
and  cotton  manufacturing,  an  assembling  industry  such  as  auto- 
mobile manufacturing,  or  a  jobbing  business  such  as  that  of  a 
machine  shop  turning  out  chiefly  special  order  work.  Establish- 
ments of  the  third  class  obviously  offer  little  opportunity  for  stand- 
ardization and  their  statistical  systems  are  highly  individualized. 
In  the  first  two  classes  of  establishments,  however,  there  is  more 
or  less  standardization  and  the  greater  the  standardization  the 
simpler  is  the  system  of  records  and  reports.  The  statistical 
system,  finally,  depends  also  upon  the  size  of  the  establishment. 
A  large  establishment  not  only  can  afford  to  maintain  an  elabo- 
rate system  of  statistical  records  but  the  very  magnitude  of  the 
business  with  its  delegation  of  responsibilities  necessitates  a 
comprehensive  and  thorough-going  system  of  checks  and  balances. 

The  selections  reprinted  in  this  chapter  may  be  grouped  under 
six  headings  —  (i)  purchasing  and  stores  statistics,  (2)  labor 
statistics,  (3)  machine  records,  (4)  records  of  progress  of  work, 
(5)  records  of  shipments,  and  (6)  cost  statistics.  Although  most 
of  these  articles  were  not  written  from  the  statistical  standpoint, 
they  illustrate  some  of  the  statistical  problems  involved  in 
keeping  factory  records. 

Purchasing  and  Stores  Statistics 

Although  the  place  of  the  purchasing  department  in  the  organ- 
ization and  the  form  of  purchasing  records  to  be  kept  depend 
upon  the  type  of  business,  in  all  manufacturing  establishments  it 
is  generally  worth  while  to  keep  purchase  records  which  at  least 
show  the  total  quantities  of  each  of  the  important  materials  pur- 
chased. Such  statistics  are  useful  for  purposes  of  comparison 
even  where  they  are  not  utilized  as  guides  for  future  purchases. 
In  a  machine  shop  purchases  are  made  largely  upon  requisition, 


404  BUSINESS  STATISTICS 

according  to  the  vaiying  needs  of  the  plant;  consequently  the 
purchasing  agent  in  such  an  establishment  has  little  discretion  in 
determining  the  quantity  to  be  ordered  or  the  time  of  ordering  and 
only  a  simple  form  of  record  is  used.^  In  other  businesses  the 
purchasing  agent  frequently  has  occasion  to  utilize  not  only  the 
records  of  previous  purchases  but  also  other  statistical  reports 
and  records.  In  a  cotton  mill,  for  example,  the  purchasing  of  the 
raw  material  is  commonly  under  the  immediate  direction  of  the 
treasurer,  who  is  the  chief  executive  officer  of  the  company,  and, 
when  the  market  conditions  seem  to  make  such  a  course  advisable, 
raw  cotton  is  often  bought  in  large  quantities  in  advance  of  the 
needs  of  the  mill.  The  cotton  mill  treasurer,  therefore,  finds  it 
necessary  to  follow  closely  statistical  reports  of  crop  conditions, 
prices,  raw  cotton  movement,  and  stocks  available  in  the  various 
markets. 

'In  the  prices  of  some  materials,  agricultural  products  and 
others,  there  are  seasonal  fluctuations,  and  a  knowledge  of  these 
fluctuations,  determined  by  occasional  statistical  investigations 
of  prices  paid  or  of  quotations  received,  enables  a  purchasing 
agent  to  regulate  his  purchases  so  as  to  take  advantage  of  the 
seasonal  swing. 

In  the  stores  department  of  a  manufacturing  establishment  it  is 
a  common  practice  to  keep  a  perpetual  inventory  for  each  material 
and  for  all  supplies.  From  such  a  record  it  is  possible  to  ascertain 
not  only  the  quantity  on  hand  at  any  time  but  also  the  quantity 
received  and  the  quantity  used  —  statistics  which  have  high 
value  for  purposes  of  comparison.  These  figures,  together  with 
a  record  of  materials  on  order  (ordered  but  not  delivered)  and  a 
knowledge  of  the  time  required  for  securing  the  delivery  of  fresh 
supplies,  are  also  utilized  statistically  in  estabHshing  maximum 
and  minimum  stores  limits  for  the  guidance  of  the  stores  clerk  or 
the  purchasing  agent. 

Labor  Statistics 

Under  labor  statistics  the  first  item  is  the  record  of  production 
by  each  laborer  and  by  each  group  of  laborers.    These  records  are 

^  One  form  of  purchase  record  was  shown  on  page  10. 


FACTORY  STATISTICS  405 

to  be  compared  with  standards  which  have  been  established  either 
through  time  studies  or  other  special  investigation  or  from  a 
statistical  tabulation  of  past  records.  The  methods  of  working 
out  standards  from  time  studies  and  from  past  records  has 
previously  been  explained  (pages  26-27). 

In  some  factories,  in  order  to  detect  waste,  a  record  is  kept  of 
the  materials  used  by  each  workman.  In  a  shoe  factory,  for 
instance,  a  record  may  be  kept  of  the  number  of  soles  cut  from  a 
given  quantity  of  sole  leather  by  each  cutter,  with  an  entry  of  any 
gain  or  loss  over  the  estimated  yield  of  the  material.  The  daily 
figures  for  net  gain  or  loss  are  combined  in  the  form  of  cumulative 
records  which  afford  an  excellent  check  upon  the  workman.  In  a 
machine  shop  a  record  may  be  kept  to  show  the  quantity  of  work 
spoiled  by  each  workman,  or  in  a  weaving  department  of  a  textile 
mill  a  record  of  the  quantity  of  second-grade  cloth  woven.  From 
these  individual  records  totals  may  be  computed  which  provide 
valuable  checks. 

Payroll  records,  in  addition  to  their  primary  use  for  accounting 
purposes,  are  occasionally  utilized  in  connection  with  records  of 
production  as  a  source  of  information  to  aid  in  changing  from  a 
system  of  time  wages  to  a  system  of  piece-rates.  The  payroll 
shows  what  the  earnings  have  been  for  each  class  of  workmen  and, 
if  the  system  of  remuneration  is  changed,  the  piece-rates  are 
adjusted  so  that  the  workmen  will  earn  at  least  as  much  as  pre- 
viously, provided  the  same  rate  of  production  is  maintained.  The 
payroll  figures  for  individual  employees  are  sometimes  followed 
regularly  to  ascertain  whether  or  not  earnings  under  a  piece-rate 
system  are  increasing  or  falling  off.  If  any  workmen  show  a  con- 
tinued falling  off,  it  is  generally  a  sign  of  trouble  and  may  lead 
to  discontent  on  the  part  of  the  employees.  By  detecting  the 
decline  before  it  is  too  late,  the  manager  may  be  able  to  remedy 
the  difficulty. 

Recently  manufacturers  have  begun  to  give  attention  to  what 
is  called  the  "  labor  turnover,"  or  the  frequency  of  change  in  the 
personnel  of  the  working  force.  Oftentimes  an  unhealthy  state  of 
affairs  has  been  revealed  —  a  rapidly  changing  labor  force  and  a 
large  number  of  men  hired  to  maintain  or  slightly  increase  the 


4o6  BUSINESS  STATISTICS 

total  number  employed.  The  term  "  turnover  "  is  suggestive 
but  in  its  application  to  employment  it  has  never  been  exactly 
defined  and  obviously  cannot  be  used  in  the  same  sense  in  which 
it  is  applied  to  stock-turn.  Owing  to  the  danger  of  confusion  with 
the  usage  of  the  term  for  other  purposes,  it  does  not  seem  advis- 
able to  attempt  to  formulate  a  standard  definition  and  that  is  not 
necessary  for  practical  purposes  since  the  desired  results  can  be 
presented  without  such  definition. 

There  are  two  distinct  but  closely  related  ideas  involved  in  the 
discussion  of  this  topic:  the  first  is  the  comparison  of  the  number 
of  persons  hired  with  the  net  increase  or  decrease  in  the  number 
employed  and  the  second  is  the  ratio  of  the  number  of  new 
employees  to  the  number  of  permanent  employees.  If  the  total 
number  of  employees  in  a  given  plant  is  1200  at  the  beginning 
of  the  month  and  1500  at  the  end  of  the  month  but  600  new 
employees  have  been  hired,  it  has  been  necessary  to  hire  two  men 
on  the  average  for  each  position  filled  during  the  month.  A 
record  which  shows  this  fact  affords  a  valuable  check  upon  the 
employment  manager  since  it  indicates  the  care  with  which 
employees  are  selected.  The  record  should  be  planned,  therefore, 
to  show  the  number  of  employees  on  the  payroll  at  the  beginning 
of  each  month,  the  number  leaving  during  the  month,  the  number 
hired,  and  the  number  on  the  payroll  at  the  end  of  the  month.  ^ 
From  these  monthly  records  annual  totals  can  be  compiled.  At 
the  end  of  the  year  a  record  may  also  be  compiled  to  show  the 
total  number  on  the  payroll  and  the  number  who  have  been  in  the 
employment  of  the  company  for  the  entire  year.  From  these 
figures  the  ratio  of  veterans  to  recruits  can  be  determined,  a  ratio 
of  significance  in  many  plants  since  if  the  ratio  of  veterans  is  low  it 
indicates  improper  selection,  dissatisfaction,  or  internal  friction. 
These  same  methods  are  apphcable,  of  course,  in  department 
stores  or  in  other  establishments  employing  large  numbers  of 
persons. 

Machine  Records 

For  machine  performance,  records  are  kept  to  show  the  produc- 
tion by  each  machine  and,  if  the  machine  is  in  operation  only  part 
^  In  some  establishments  a  weekly  record  of  this  sort  may  be  preferred. 


FACTORY  STATISTICS  407 

of  the  total  operating  time  of  the  factory,  the  number  of  hours 
operated.  These  figures  may  be  compared  with  established 
standards.    They  are  also  useful  for  cost  accounting  purposes. 

Records  of  Progress  of  Work 

The  individual  records  for  materials,  workmen,  and  machines 
are  totaled  by  departments  to  show  the  amount  of  work  per- 
formed in  each  department  and  to  check  up  results.  If  a  schedule 
is  used,  reports  are  also  required  to  show  the  progress  of  work. 
At  all  points  where  it  is  possible  for  partially  manufactured  stock 
to  accumulate,  records  should  be  kept  to  show  daily  or  weekly  the 
quantity  on  hand.  This  aids  in  preventing  a  dearth  at  one  place 
or  a  congestion  at  another.  In  a  properly  balanced  plant  these 
accumulations  are  reduced  to  a  minimum,  but  they  need  to  be 
checked  constantly.  In  the  stockroom,  where  finished  goods  are 
stored,  records  are  obviously  necessary  in  order  to  provide 
essential  information  to  the  sales  department  as  well  as  to  the 
general  management.  The  stock  records  in  a  manufacturing  plant 
with  a  diversified  output  which  may  be  carried  in  stock  are 
similar  to  the  stock  records  kept  in  a  wholesale  house. 

Records  of  Shipments 

In  the  shipping  department  classified  records  of  shipments  are 
kept.  Another  set  of  statistics,  which  is  less  common  but  none 
the  less  valuable,  is  for  delinquent  deliveries,  and  in  some  factories 
these  figures  are  most  readily  kept  in  the  shipping  department. 
They  show  the  number  and  value  of  all  unfilled  orders  which  have 
not  been  delivered  upon  the  promised  date.  Punctuality  in 
delivery  is  an  important  means  of  maintaining  good  will.  A 
manufacturer  with  a  reputation  for  punctuaHty  in  delivery  secures 
many  an  order  over  a  competitor  who  offers  a  lower  price  but 
who  has  a  reputation  for  dehnquency  in  making  deliveries.  This 
is  an  item  well  worth  watching  constantly,  and  a  statistical 
record  best  serves  this  purpose. 


408  BUSINESS  STATISTICS 

Cost  Statistics 

Cost  statistics  are  closely  related  to  the  other  factory  statistics. 
It  is  this  relation  which  it  is  intended  to  bring  out  here,  without 
entering  upon  a  discussion  of  the  accounting  aspects  of  these 
figures.  The  selections  on  this  subject  are  intended  merely  to 
indicate  the  statistical  problems  involved  in  the  selection  of  units, 
and  the  records  which  are  needed  as  a  basis  for  the  determination 
of  rates.  If  a  machine-hour  rate  is  to  be  established,  for  example, 
it  is  necessary  to  know  the  normal  number  of  hours  which  each 
machine  is  in  operation,  and  this  is  ascertained  from  past  records. 

I.  The  Purchasing  Agent  ^ 

By  Euhu  C.  Church 

Purchasing  has  generally  been  considered  merely  in  the  narrow 
sense  of  giving  a  man  a  requisition  and  then  requiring  him  to  buy 
the  material  called  for,  for  as  little  money  as  possible.  This  is 
doing  a  ''  commission  house  "  business  in  its  narrowest  sense,  and 
can  in  no  way  effect  the  desired  results.  Correct  purchasing  is 
not  merely  a  matter  of  "  bu3dng."  The  buying  has  but  little  to 
do  with  the  real  economy  and  efficiency  of  the  undertaking.  The 
work  of  the  purchasing  agent  should  begin  before  the  requisition  is 
drawn,  and  should  continue  after  the  goods  have  been  bought, 
dehvered  and  inspected.  He  should  see  that  the  goods  are  prop- 
erly stored  and  issued,  that  they  are  put  to  the  use  intended, 
that  they  are  used  efficiently,  and  that  they  are  kept  in  service  till 
worn  out. 

The  purchasing  problem  is  the  most  interesting  and  the  most 
important  subject  before  American  business  men.  It  not  only 
largely  governs  the  economy  of  all  their  expenditures  except  rent 
and  payroll,  but  it  should  also  control  their  selling  policies.  Goods 
are  only  sold  because  some  one  wants  to  buy;  the  customer's 
purchasing  problems  determine  the  manufacturer's  selling 
problems.    To  sell  properly  one  must  meet  the  requirements  of 

^  Engineering  Magazine,  June,  1915,  pp.  420-421.  Reprinted  by  permission 
of  Engineering  Magazine. 


FACTORY  STATISTICS  409 

those  who  buy.  To  talk  of  a  sales  policy  except  in  terms  of  the 
purchaser's  buying  policy  is  foolish. 

It  is  only  when  the  full  scope  of  the  problem  is  considered  that 
the  opportunities  for  savings  and  improvements  can  be  realized. 
Strange  as  it  may  seem,  the  actual  prices  paid  for  supplies  and 
materials  are  not  of  so  much  importance.  It  is  necessary  to 
explain  so  revolutionary  a  statement,  for  generally  price  is  about 
the  only  thing  considered  worthy  of  attention,  and  a  difference  of 
but  a  few  per  cent  between  two  bids  will  swing  the  order  from  one 
seller  to  the  other. 

In  the  first  place  much  unnecessary  material  is  bought.  While 
a  purchasing  agent  is  haggling  over  some  slight  difference  in  price 
he  may  be  unaware  that  the  supplies  he  is  bargaining  for  are  quite 
unnecessary,  in  fact  that  there  are  already  plenty  on  hand.  This 
will  often  happen  where  improper  storeroom  methods  and  the 
absence  of  the  necessary  records  fail  to  reveal  the  conditions. 

Again  too  expensive  supplies  are  often  ordered.  Perhaps  while 
all  the  attention  of  the  agent  is  being  given  to  this  small  difference 
in  price  it  may  be  that  the  man  ordering  the  supplies  in  question 
specified  qualities  and  grades  superior  to  the  requirements  of  the 
work  to  be  done.  Without  standard  specifications  based  on  the 
actual  conditions  to  be  met  it  is  easy  to  buy  materials  that  cost 
double  what  is  necessary. 

Many  requisitions  are  excessive  in  amount.  The  purchaser 
may  not  realize  that  carelessness  in  the  estimating  department 
has  resulted  in  ordering  an  excess  of  material.  Buying  even  a 
little  extra  material  which  is  not  needed  and  will  not  be  used  may 
offset  the  most  painstaking  price-saving  ten  to  one. 

Market  conditions  are  often  ignored.  Perhaps  when  supplies 
are  bought  they  are  bought  as  cheaply  as  possible,  yet  it  fre- 
quently happens  that  lack  of  forethought  makes  it  necessary  to 
go  into  the  market  when  conditions  are  unfavorable  and  prices 
high  —  just  because  no  proper  attempt  had  been  made  to  esti- 
mate the  future  requirements  of  the  business  and  plan  a  purchas- 
ing campaign  to  extend  over  a  considerable  period  of  time,  and 
thus  take  full  advantage  of  the  various  fluctuations  and  changes 
in  trade  conditions.    What  is  a  low  price  if  forced  to  purchase  at 


4IO  BUSINESS  STATISTICS 

once  might  really  be  a  high  price  when  compared  to  the  figure 
that  might  have  been  obtained  if  the  necessity  for  making  the 
purchase  could  have  been  foreseen. 

The  best  purchasing  economies  are  rendered  of  no  avail  by  a 
careless  inspection  of  the  goods  actually  delivered.  An  infinitesi- 
mal difference  in  price  between  competitors  is  instantly  apparent 
on  the  bid  sheet,  but  vital  differences  in  the  value  of  their  respec- 
tive deHveries  might  remain  undiscovered  unless  there  be  a 
careful  and  systematic  inspection  of  all  goods  bought.  Superficial 
examination  and  a  mere  counting  and  weighing  will  not  sufiice. 

Poor  methods  of  stores  control  are  frequent.  Iniproper  care  of 
supplies,  and  careless  methods  of  storage  and  issue  lead  to  losses 
from  deterioration,  waste  and  theft  that  counterbalance  the 
possible  savings  due  to  careful  purchasing  many  times  over.  An 
improperly  conducted  storeroom  is  capable  of  producing  greater 
and  more  different  kinds  of  loss  and  annoyance  than  any  other 
one  spot. 

t'requently  supplies  are  not  put  to  the  use  for  which  they  were 
intended.  High  grade  materials  are  invariably  issued  by  careless 
men  in  charge  of  suppHes  if  the  cheaper  article  called  for  is  not  in 
stock  or  convenient  to  get  at.  The  difference  in  price  between  the 
material  actually  used  and  the  material  that  would  have  served 
the  purpose  is  a  clear  loss. 

If  supplies  are  not  used  efficiently  and  economically  the  quan- 
tities requisitioned  will  be  excessive.  This  excess  is  an  absolute 
loss ;  it  is  a  direct  loss ;  and  it  is  generally  a  great  loss.  For  instance, 
if  a  boiler  room  is  so  managed  that  the  coal  produces  only  80  per 
centof  the  steam  that  it  should — ^it  simply  means  that  the  coal  bill 
is  25  per  cent  greater  than  necessary.  Similarly  for  all  supplies. 
It  is  "  straining  at  a  gnat  and  swallowing  a  camel  "  to  direct  all 
one's  attention  to  the  price  of  the  material  purchased,  and  then 
permit  it  to  be  used  inefficiently. 

Goods  should  be  taken  care  of  and  used  as  long  as  possible.  It 
should  be  apparent  that  the  value  remaining  in  an  article  which  is 
discarded  or  replaced  before  being  worn  out  is  practically  all  lost. 
If  a  tool  or  machine  capable  of  rendering  a  certain  number  of 
units  of  service  be  cast  aside  when  it  is  four-fifths  worn  out  the 


FACTORY  STA TISTICS  4 1 1 

loss  of  the  remainder  is  equivalent  to  adding  one-quarter  to  its 
original  cost.  A  purchasing  agent  can  seldom  effect  a  price  reduc- 
tion of  anything  like  this  amount,  yet  a  careful  use  of  equipment, 
a  proper  policy  of  maintenance  and  upkeep,  a  habit  of  taking 
care  of  one's  things  and  making  minor  repairs  when  necessary, 
may  double  or  treble  the  life  of  one's  plant. 

The  philosophy  of  correct  purchasing  consists  in  getting  the 
right  materials,  in  proper  quantities,  at  a  low  price,  and  with  as 
little  cost  for  the  doing  of  it  as  possible.  But  the  fact  must  be 
emphasized  that  purchasing  is  but  one  part  of  the  larger  problem 
of  stores  control.  No  matter  how  well  the  mere  purchasing  func- 
tion is  carried  out  the  losses  due  to  improper  methods  of  drawing 
requisitions,  and  to  unscientific  inspection,  storage,  issue  and  use 
of  supplies  may  more  than  offset  all  the  savings  in  power  plant, 
factory  and  office. 

II.  Anticipating  Buying  Emergencies  ^ 

By  H.  a.  Russell 

There  are  frequently  times  when  the  question  of  price  is  an 
insignificant  factor,  as  compared  with  the  need  of  securing  the 
desired  material,  supplies,  equipment  or  repair  parts  of  some 
machine  that  has  broken  down  in  the  midst  of  a  rush  period.  The 
question  of  whether  to  have  a  heavy  shipment  come  forward  by 
express  or  freight  can  usually  be  decided  in  a  few  minutes.  The 
important  item  is  to  know  the  one  best  and  quickest  method  of 
securing  the  article  needed.  The  purchasing  department  must 
look  ahead,  not  only  of  the  requirements  of  the  factory,  but  also 
of  the  prospective  orders  which  the  sales  department  is  endeavor- 
ing to  secure.  The  greater  the  problem  of  obtaining  satisfactory 
deliveries,  the  more  evident  will  become  the  efficiency  or  non- 
efficiency  of  the  purchasing  department.  Six  months  ago  was 
none  too  soon  to  prepare  for  the  present  congested  condition  of 
the  steel  mills. 

First,  let  us  consider  the  question  of  anticipating  the  require- 
ments of  materials  which  later  become  a  part  of  the  finished 

^  Iron  Age,  December  2,  1915,  pp.  13C50-1302.  Reprinted  by  permission  of 
Iron  Age.     Illustrations  of  forms  are  omitted. 


412  BUSINESS  STATISTICS 

product.  If  the  product  consists  of  standard  lines,  placed  on  the 
market  from  year  to  year,  the  purchase  records  should  clearly  and 
accurately  indicate  the  variations  in  price  from  time  to  time,  the 
quantity  used  during  a  season  or  year,  the  standard  quality  used 
and  possible  substitutes,  the  list  of  sellers  of  each  item  from  whom 
purchases  have  actually  been  made  and  a  further  list  of  sellers 
from  whom  the  same  items  can  be  obtained.  With  such  records 
the  buyer  has  a  solid  foundation  on  which  to  build  up  his  purchase 
program  for  the  period  ahead,  and  it  matters  very  little  whether 
the  period  is  to  be  of  six  months  or  longer  duration.' 

Supposing  that  after  the  buyer  has  taken  every  precaution  to 
have  the  materials  coming  along,  as  the  factory  needs  may 
demand,  and  through  some  cause,  beyond  the  control  of  the  seller, 
shipment  will  be  considerably  delayed.  Does  the  buyer  then 
throw  up  his  hands  and  pass  the  information  along  to  the  pro- 
duction department,  or  does  he  get  busy  and  secure  the  material 
elsewhere  ?  It  depends  to  a  great  extent  on  the  amount  of  pre- 
cautionary work  that  has  been  done  beforehand. 

We  all  know  that  there  are  certain  items  for  which  no  reason- 
able substitutes  are  available,  but  is  it  not  a  fact  that  the  propor- 
tion of  these  items  is  comparatively  small  ?  And  is  it  not  also  a 
fact  that  even  this  proportion  can  be  considerably  reduced,  if  we 
keep  our  eyes  open  and  constantly  try  out  and  experiment  with 
new  things  ?  In  our  product  we  use  a  number  of  sections.  To 
secure  a  few  tons  of  any  of  these  may  take  many  months.  When 
our  order  is  sent  in  to  the  mill  it  is  entered  and  held  until  sufficient 
tonnage  has  been  received,  from  other  sources,  to  justify  a  rolling. 
Usually  this  procedure  is  satisfactory  because  we  have  anticipated 
our  requirements.  Supposing,  however,  that  the  rolling  was 
delayed  longer  than  usual  and  it  was  necessary  for  us  to  secure 
this  material  or  lose  a  number  of  orders.  Our  first  step  in  an 
instance  of  this  kind  would  be  to  look  over  the  list  of  possible 
substitutes  and  get  in  touch  with  the  makers,  with  as  little  delay 
as  possible,  and  in  the  majority  of  instances  we  have  been  able  to 
secure  the  substitute  section  in  time  for  the  factory  needs.  The 
question  of  cost  does  not  enter  into  the  matter  as  much  as  the 
question  of  whether  the  substitute  section  will  give  as  good  service 
as  the  one  it  replaces. 


FACTORY  STATISTICS  413 

Now  let  us  consider  the  proposition  of  making  use  of  the  many- 
large  stocks  of  steel  bars,  angles,  channels,  sheets  and  plates,  etc., 
that  are  carried  in  all  the  larger  cities,  and  any  item  of  which  can 
be  usually  shipped  the  same  day  up  to  varying  limits  of  tonnage. 
Almost  all  of  the  warehouses  issue  monthly  stock  lists  and  these, 
when  received,  should  be  properly  filed  so  that  they  are  instantly 
accessible.  As  the  latest  issue  comes  to  hand,  the  previous  copy 
must  be  destroyed;  otherwise  reference  may  be  made  to  what  will 
then  be  an  incorrect  list  and  valuable  time  may  be  lost.  Where 
the  lengths  carried  in  the  warehouses  are  at  all  suitable  for  the 
requirements,  delay  will  be  avoided  by  specif3dng  these  stock 
lengths.  At  times  when  the  stock  lengths  will  cause  too  much 
waste,  as  in  the  instance  of  large  sizes  of  I-beams,  channels,  etc., 
the  best  plan  is  to  specify  the  exact  length,  and  as  these  sections 
are  generally  carried  in  various  lengths,  from  a  few  feet  up  to 
forty  feet  or  even  fifty  feet  long,  the  small  quantity  ordered  can  be 
cut  from  the  longer  pieces  and  still  leave  a  desirable  length  on 
hand.  As  the  warehouse  price,  at  the  present  date,  is  from  one- 
half  cent  to  almost  one  cent  per  pound  (including  freight,  which 
of  course  must  be  added  to  arrive  at  a  true  figure)  higher  than 
prevailing  contracts,  the  quantities  ordered  from  stock  houses 
should  be  based,  as  closely  as  possible,  on  the  amount  of  tonnage 
required  to  keep  factory  orders  on  the  move,  until  a  further  supply 
of  that  particular  size  will  be  received  from  the  mill. 

When  an  inquiry  is  received  for  certain  machines,  which  are  not 
a  part  of  the  standard  line,  and  the  space  of  time  allowed  for  ship- 
ment would  not  permit  of  securing  the  material  from  your  regular 
mill,  your  quotation  should  be  based  on  warehouse  prices.  Under 
present  conditions  it  is  extremely  unlikely  that  your  competitors 
will  be  able  to  secure  the  desired  materials  any  sooner  than  you 
can. 

As  I  have  remarked  before,  the  factory  stockrooms  should  be 
xmder  the  control  of  the  purchasing  department,  working  in 
conjunction  with  the  production  department.  The  stocks  of  the 
various  items  should  be  governed  by  a  low  and  high  limit  for  each 
item.  These  limits  are  to  be  set  by  the  purchasing  department 
and  can  only  be  changed  by  its  instructions.    When  materials 


414  BUSINESS  STATISTICS 

and  supplies  are  readily  obtainable  and  deliveries  are  prompt,  the 
high  limits  can  be  reduced;  when  the  securing  of  these  items  is  a 
question  of  weeks,  instead  of  days,  the  limit  must  be  raised. 
These  limits  should  be  changed  only  upon  written  instructions 
being  received  from  the  purchasing  department.  Our  usual 
method  of  notifying  the  stockroom  keepers  of  a  change  is  to  send 
them  a  typewritten  memorandum,  somewhat  as  follows:  ''  Until 
further  notice,  reduce  (or  raise)  the  low  (or  high)  limits  on  car- 
riage and  machine  bolts  20  per  cent."  To  the  man  in  charge  of 
the  stock  of  steel  bars,  slabs,  etc.,  and  the  sizes  of  which  are  used 
for  so  many  different  machines  that  we  carry  the  different  items 
on  a  low  limit  basis,  we  send  each  week  a  list  comprising  about 
thirty  of  the  leading  sizes  and  then  receive  his  report  of  the 
quantities  on  hand.  In  the  office  we  record  this  information  as 
received  and  by  comparing  the  quantities  on  hand  with  the  low 
limits  that  have  been  set,  we  are  enabled  to  have  a  complete 
grasp  on  this  stock.  As  soon  as  the  stock  on  hand  of  any  of  these 
items  falls  below  the  limit  that  has  been  set  we  refer  to  the  card 
which  shows  the  quantities  of  each  item  specified  with  the  mill, 
and  hurry  up  shipment  of  such  items  as  are  necessary.  These  low 
limits  are  changed  also  as  conditions  necessitate. 

This  perpetual  inventory  of  stock  on  hand  and  list  of  orders 
placed  and  material  en  route  is  kept  in  the  purchasing  depart- 
ment, and  consequently  the  responsibility  of  keeping  the  stock 
ahead  of  requirements  rests  there  also.  In  keeping  the  perpetual 
weekly  inventory,  the  top  figure  in  each  section  indicates  the 
quantity  on  hand  in  net  tons,  the  second  figure  indicates  the 
tonnage  shipped  but  not  yet  received,  or  if  in  a  car  on  the  switch 
not  yet  unloaded,  and  the  third  figure  indicates  the  total  ton- 
nage of  the  item  ordered  from  the  several  mills  and  unshipped. 
The  amount  of  the  tonnage  specified  of  each  of  these  items, 
also  the  order  number,  date  and  seller  are  also  recorded,  and 
the  extreme  right-hand  column  of  each  section  provides  a  place 
to  indicate  the  date  the  item  was  shipped.  We  have  not  pro- 
vided a  space  to  note  the  promise  of  shipment,  as  we  preferred 
to  note  this  on  the  copy  of  the  order.  We  divide  the  tonnage  of 
the  different  sizes  between  the  mills.    We  have  found  it  advan- 


FACTORY  STATISTICS  415 

tageous  to  do  so,  for  the  reason  that  often  one  of  the  mills  will 
have  a  rolling  of  a  size  about  the  time  that  we  need  the  material. 
As  a  proof  that  it  pays  well  to  watch  each  item  carefully,  I 
would  instance  our  own  particular  case.  Several  years  ago,  when 
mill  deliveries  were  from  three  to  six  months  behind  orders 
and  our  total  tonnage  for  the  year  was  over  2000  tons,  it  was 
only  necessary  to  order  from  the  different  stock  houses  a  total 
of  less  than  20  tons,  or  less  than  i  per  cent  of  the  requirements. 
Furthermore,  no  shipments  of  customers'  orders  were  delayed, 
nor  was  the  factory  held  up  at  any  point  in  getting  out  the  maxi- 
mum output.  Of  course  daily  consultation  with  the  departmental 
foremen  was  a  necessary  part  of  the  routine.  It  might  be  well 
to  state  here  that  these  consultations  are  usually  handled  by 
the  production  department,  who,  in  a  brief  summary,  report 
to  the  purchasing  department. 

Where  the  product  is  practically  uniform  from  year  to  year  and 
the  estimated  sales  for  the  year  ahead  can  be  based  on  the  sales 
for  the  previous  years,  taken  in  conjunction  with  the  outlook  for 
the  coming  period,  it  is  only  a  matter  of  detail  to  work  out  the 
quantities  of  all  the  materials  needed  to  manufacture  the  required 
number  of  machines.  Here  the  buyer  has  a  great  opportunity  to 
tie  up  a  large  amount  of  non-producing  capital,  unless  he  is 
familiar  with  the  selling  season  for  each  group  of  machines.  It 
is  very  easy  to  order  many  items  which  may  not  be  needed  for 
months  ahead,  and  the  amount  of  money  involved  could  be  earn- 
ing at  least  the  average  banking  rate  of  interest,  even  providing 
it  could  not  be  used  to  better  advantage  elsewhere.  Besides  if  the 
material  is  received  too  far  in  advance  of  actual  needs  it  will  take 
up  storage  room  which  could  be  used  for  other  quicker  moving 
items.  Only  by  exercising  his  best  judgment  may  the  buyer 
satisfy  himself  that  it  is  wiser  to  order  materials  a  considerable 
length  of  time  ahead  of  requirements,  in  order  to  take  advantage 
of  a  low-priced  contract  that  is  about  to  expire. 

A  card  shows  the  method  of  keeping  the  boiler  stock  up  to  the 
low  limits,  which  in  this  instance  are  set  by  the  sales,  purchasing 
and  production  departments,  working  in  unison.  The  figures 
in  the  second  column  indicate  the  quantity  of  boilers  of  each 


4l6  BUSINESS  STATISTICS 

size  and  style  which  are  to  be  carried  on  hand  over  and  above 
active  customers'  orders.  These  low  limits  do  not,  in  all  in- 
stances, indicate  finished  boilers  ready  to  ship  but  rather  the 
number  of  finished  boilers,  plus  the  boilers  partly  finished,  plus 
the  quantity  of  plate  on  hand  from  which  each  size  and  style 
can  be  later  constructed. 

The  figures  in  the  remaining  columns  show  the  stock  on  hand, 
finished  and  partly  finished  and  plate,  at  each  of  the  dates  shown 
at  the  top  of  the  colunms.  This  card  gives  an  instantaneous 
reference,  not  only  for  the  stock  on  hand,  but  also  the  number  of 
each  size  and  style  sold  in  a  given  period.  If  the  figures  do  not 
indicate  a  rapid  movement  of  any  particular  size,  the  low  limits 
can  be  reduced.  However,  if  they  indicate  a  movement  above 
normal  the  limits  are  raised,  to  be  advanced  further  if  necessary. 
As  will  readily  be  seen  the  record  can  never  be  more  than  a  week 
behind  the  actual  facts.  For  the  purpose  of  keeping  these  two 
perpetual  inventories,  steel  bars  and  boilers,  we  use  a  card  meas- 
uring 5  X  14-in.  A  card  of  this  size,  while  special,  affords  a  com- 
parison for  a  much  longer  period  than  the  usual  standard  5  x  8-in. 
card.  In  fact  we  use  these  5  x  14-in.  cards  for  a  variety  of  pur- 
poses, such  as  recording  the  amount  and  cost  of  electric  power 
and  light  used  monthly  and  yearly,  the  amount  and  cost  of  coal, 
pig  iron  and  scrap,  purchased  yearly,  etc.  The  greater  the 
quantity  of  these  records  the  buyer  has  at  his  command  the  more 
intelligently  can  he  foresee  the  needs  of  the  plant. 

At  times  quick  action  is  needed  to  secure  a  repair  part  for  some 
machine  that  has  broken  down  in  the  middle  of  a  busy  season. 
While  certain  important  parts  of  the  larger  machines  are  carried 
in  reserve,  it  is  hardly  possible  to  carry  a  duplicate  stock  of  all  the 
parts  that  may  break.  When  we  purchase  new  equipment  a  most 
complete  record  is  made  of  each  machine;  the  seller's  name  and 
address,  the  maker's  shop  number  and  the  size  and  style  of  the 
machine,  a  list  of  all  the  loose  parts  which  are  regular  or  special, 
the  date  and  number  of  the  invoice,  the  purchase  order  number 
and  the  maker's  factory  order  number,  if  given.  All  these  are  a 
part  of  the  record.  It  is  advisable  to  have  the  factory  address 
also.    It  may  very  well  happen  that  if  this  information  is  at  hand. 


FACTORY  STATISTICS  417 

a  considerable  delay  can  be  avoided  in  securing  the  duplicate 
parts.  For  instance,  if  a  breakdown  occurs  late  in  the  afternoon 
a  telegram  can  be  sent  at  once  if  the  purchase  record  is  complete, 
and  shipment  of  the  parts  can  usually  be  made  the  same  day,  but 
if  valuable  time  must  be  wasted  in  locating  the  original  order  or 
the  invoice  the  telegram  will  reach  its  destination  too  late  to 
permit  of  shipment  being  made  until  the  following  day.  A  large 
percentage  of  machines  are  sold  through  agencies  or  branch  offices 
located  many  miles  from  the  factory,  so  it  can  readily  be  seen  that 
the  items  of  factory  address  and  order  number  are  of  real  impor- 
tance. Often  the  foreman  is  undecided  whether  to  have  the  opera- 
tor report  for  work  in  the  morning  or  lay  off  until  word  is  sent  to 
him  that  the  machine  is  ready  for  use  again.  A  request  for  a  reply 
to  the  telegram  or  a  long-distance  telephone  call  will  generally 
settle  this  point.  In  any  event  the  first  definite  information 
should  be  passed  along  without  delay,  not  only  to  the  foreman  but 
to  the  production  department  as  well. 

Another  emergency  that  often  confronts  the  buyer  is  the  pur- 
chase of  a  new  line,  possibly  the  result  of  a  recent  invention,  or  it 
may  be  a  product  which  has  been  upon  the  market  for  a  number 
of  years,  but  up  to  the  time  the  emergency  arises  the  buyer  has 
not  been  called  upon  to  add  it  to  his  list  of  purchases.  To  be 
prepared  to  handle  these  promptly  and  intelligently  the  file  of 
Buyers^  Guides,  Commercial  Registers,  etc.,  should  be  complete 
and  up  to  date.  Circulars,  clippings  and  memoranda  should  be 
carefully  filed  and,  where  necessary,  indexed,  if  they  in  any  way 
refer  to  products  which  are  then,  or  may  become  later,  a  corporate 
part  of  the  manufactured  lines. 

III.  Checking  Losses  in  the  Storeroom  ^ 

By  Wjxtord  G.  Astle 

The  balance-of -stores  system  of  issuing,  handling  and  accounting 
for  raw  materials  may  at  first  seem  overwhelming  to  the  managers 
of  small  concerns,  who  may  consider  it  too  elaborate  for  their 
needs.    It  is  well  to  remember,  however,  that  the  broad  general 

*  Iron  Trade  Review,  January  27,  1916,  pp.  235-239.  Reprinted  by  permis- 
sion of  Iron  Trade  Review.    Illustrations  of  several  forms  are  omitted. 


41 8  BUSINESS  STATISTICS 

principles  of  a  balance-of -stores  system  can  be  applied  to  a  business 
of  any  size,  as  are  the  principles  of  double-entry  bookkeeping. 
The  late  Frederick  W.  Taylor,  who  was  probably  the  first  man  to 
study  and  work  out  the  details  of  this  system,  laid  great  stress 
on  the  importance  of  the  proper  handling  of  stores;  in  fact,  the 
efficiency  engineer,  when  he  is  called  in  to  direct  a  fight  against 
waste  and  inefficient  methods,  usually  attacks  first  the  stores 
problem,  which  constitutes  one  of  the  greatest  sources  of  loss.  If 
an  employee  walked  into  the  office,  picked  up  a  50-cent  piece,  and 
put  it  in  his  pocket,  he  would  promptly  be  discharged.  In  the 
storeroom,  however,  the  careless  handhng,  loss  and  even  pilfering 
of  material  worth  many  times  such  a  sum,  is  mildly  deplored, 
but  nevertheless  considered  a  part  of  the  game. 
The  usual  storeroom  losses  can  be  classified  as  follows : 
Loss  due  to  carrying  larger  quantities  of  supplies  than  required; 
loss  in  delaying  work  or  holding  up  the  workmen;  loss  due  to 
wasteful  methods  in  the  plant,  and  loss  due  to  wasteful  use  of 
material,  resulting  from  wrong  methods  of  issuing  and  accounting. 
The  balance-of-stores  system,  when  properly  installed,  becomes 
an  important  adjunct  to  the  purchasing  department,  because  the 
stores  records  can  be  used  to  answer  the  purpose  of  price  cards  and 
also  take  the  place  of  the  purchasing  records  as  in  the  cases  of 
firms  or  persons  receiving  orders. 

Types  of  Organization 

Three  distinct  types  of  organization  exist  at  present  among 
manufacturing  enterprises.  One  of  them  is  the  old  disorganized 
factory  which  has  just  "  grown  up."  In  it  you  will  find  the  store- 
room without  any  special  system  of  control.  The  second  is  the 
factory  which  has  discovered  many  wastes  due  to  its  unorganized 
condition  and  has  taken  means  to  check  them.  In  this  type  of 
factory  the  storerooms  are  carefully  looked  after,  separate  depart- 
ments and  office  force  being  provided  for,  and  the  authority  of  the 
persons  in  control  of  accounting  and  purchasing  is  clearly  defined 
in  relation  to  the  stores  department.  All  material  is  carefully 
classified,  definitely  located  and  guarded  by  a  proper  system  of 
requisitions,  records  and  inventories.    The  third  type  includes 


FACTORY  STATISTICS  419 

firms  which  have  adopted  the  scientific  management  system.  In 
this  type  we  will  find  that  the  material  is  not  only  guarded  by 
systematic  accounting,  but  a  special  clerk  is  provided  to  keep  a 
balance-of -stores  record.  This  clerk,  being  located  in  the  planning 
office  from  which  come  all  orders  pertaining  to  stores,  can  tell  at 
any  time,  by  means  of  his  records  and  location  chart,  the  status 
of  any  material  and  where  it  can  be  found. 

In  addition  to  systematized  method,  modern  management 
requires  that  not  only  the  material  for  the  manufactured  product, 
but  all  materials  and  suppHes  used  in  the  plant,  shall  be  controlled 
by  the  authority  of  the  department  of  general  stores.  It  is,  more- 
over, not  sufficient,  under  scientific  management,  to  send  a 
requisition  to  the  stores  for  needed  material.  All  orders  which 
require  material  must  go  through  the  balance-of-stores  clerk's 
hands  before  they  are  honored.  He  examines  all  items  and  assigns 
them  to  a  specific  order,  after  which  these  items  of  material  are 
not  available  for  another  order  which  may  follow.  This  is  done 
before  the  materials  are  required  for  use,  and  serves  as  an  advance 
notice  to  the  stores  clerk  of  any  unexpected  demand  for  a  partic- 
ular material.  This  makes  it  possible  to  renew  supplies  on  short 
notice.  The  planning  department  plans  out  the  movement  of 
the  material  from  the  stores  department  to  any  particular  place 
where  it  is  needed,  also  providing  for  the  return  of  material  as 
partly  finished  or  finished  product. 

It  is  sometimes  desirable,  in  the  installation  of  a  system  of  this 
nature,  to  carry  stock  for  the  ledgers  in  groups.  For  instance,  one 
group  would  include  all  staples  and  another  group  would  include 
all  goods  purchased  for  a  particular  purpose  or  job.  Such  material 
has  usually  been  handled  by  a  direct  requisition  on  the  purchasing 
agent,  from  the  department  requiring  it.  The  goods  are  delivered 
immediately  to  the  person  or  department  issuing  the  requisition. 
This  procedure  might  seem  to  be  logical  and  expedient,  but  in  a 
great  many  instances  it  has  caused  much  confusion  and  dissatis- 
faction because  the  man  on  the  job  receiving  the  goods  is  not 
concerned  with  the  proper  accounting  for  the  material,  his  duty 
being  merely  to  use  it  to  the  best  advantage.  Again,  material  has 
often  been  purchased  outside,  which  could  have  been  secured  from 


420  BUSINESS  STATISTICS 

stock.  Critics  may  point  out  that  vigilance  in  this  case  devolves 
on  the  purchasing  agent  and  the  storekeeper;  but  when  a  con- 
cern is  carrying  hundreds  of  thousands  of  dollars  worth  of 
material,  storeroom  records,  not  being  considered  as  part  of  any 
regular  stores-record  system,  cannot  and  should  not  be  expected 
to  prove  infallible.  Nor  can  the  storekeeper  keep  mental  notes  of 
everything  on  his  shelves.  In  any  system  where  an  attempt  is 
made  to  keep  cost  and  statistical  records,  it  is  much  more  simple 
to  do  so  where  all  supplies  are  handled  through  one  source  and  by 
one  method.  Quite  as  much  bookkeeping  and  clerical  work  are 
required  in  cases  where  two  schemes  involving  considerable  dup- 
lication are  in  practice,  one  for  stores  materials,  the  other  for 
supplies  not  passing  through  the  stores,  as  are  demanded  where 
one  method  is  used  for  keeping  track  of  both. 

Before  explaining  the  balance-of-stores  system  in  detail,  it 
might  be  well  to  examine  the  basis  upon  which  the  standards 
of  maximum  and  minimum  quantities  are  established.  The 
minimum  basis  for  general  stores  is  the  length  of  time  necessary 
to  replenish  the  stock  from  the  market.  If  it  requires  a  month 
after  the  purchase  order  has  been  issued,  to  get  the  material  into 
the  stores,  then  the  minimum  amount  of  any  item  must  be 
sufficient  to  supply  the  factory  for  that  period  of  time,  at  least. 

The  minimum  basis  for  finished  stores  will  depend  upon  the 
probable  shipping  orders  at  the  various  times  of  the  year  esti- 
mated from  past  records,  upon  the  time  necessary  to  get  various 
items  i^ito  stores  from  the  market,  and  upon  the  time  needed  to 
complete  the  process  of  manufacture  for  a  new  stock.  A  minimum 
stores  amount  is  in  effect  an  insurance  against  the  losses  which 
may  occur  when  sales  orders  cannot  be  met  on  time.  A  failure 
in  a  firm's  ability  to  deliver  goods  on  time  leads  not  only  to  can- 
cellation of  orders,  but  to  a  disorganized  salesforce  and  a  skeptical 
market.  When  stores  have  been  reduced  to  the  minimum  quan- 
tity, a  danger  point  has  been  reached. 

The  maximum  quantity  for  stores  is  a  somewhat  arbitrary 
factor,  but  the  essentials  to  be  considered  are  the  fluctuations  in 
the  demand  during  the  seasonal  periods.  For  example,  consider 
the  months  of  September,  October,  November  and  December  as 


FACTORY  STATISTICS  42 1 

one  period.  Suppose  that  during  this  period  the  average  monthly 
sales  are  1,000  units,  but  that  the  demand  for  October  in  some 
seasons  may  increase  to  1,500  or  more,  while  November  may  run 
as  low  as  500.  If  we  count  on  an  average  run  of  i  ,000  per  month, 
the  finished  stores  on  hand  will  run  high  during  November.  This 
surplus,  however,  will  be  absorbed  during  the  next  month.  Thus 
we  can  estimate  our  maximum  quantity  at  1,500.  A  safer  limit 
probably  would  be  2,000,  since  October's  demand  may  exceed  the 
1,500  mark,  and  it  is  not  advisable  to  cut  into  the  minimum 
reserve,  if  it  can  be  avoided. 

Just  as  the  minimum  supply  is  a  lower  limit  to  insure  against 
the  possibiKties  of  running  too  low,  so  the  maximum  quantity  is 
a  higher  limit  to  insure  against  the  overproduction  of  stock  and 
the  danger  of  running  too  high.  In  making  up  a  schedule  of 
maximum  and  minimum  quantities,  many  variable  factors  must 
be  kept  in  mind.  Perhaps  a  plant  may  be  capable  of  turning 
out  2,000  units  per  month,  but  this  amount  may  not  be  the  most 
economical  quantity  to  be  handled.  This  last  feature  may 
result  in  the  modification  of  the  maximum  amount,  since  the 
loss  due  to  carrying  a  greater  number  of  pieces  would  be  more 
than  counterbalanced  by  the  savings  made  in  manufacturing 
the  product  in  economical  quantities.  The  same  reasoning 
holds  good  for  the  general  stores  maximum.  Buying  material 
in  certain  quantities  may  be  more  economical  than  the  savings 
made  in  carrying  small  amounts. 

The  record  for  material  is  as  essential  as  a  ledger  is  for  account- 
ing, and  it  is  just  as  important  to  know  what  your  material 
balance  is  as  to  know  your  bank  balance.  Figure  i  shows  a  form 
suitable  for  a  general  stores  record,  which  also  constitutes  a  per- 
petual inventory.  At  the  top  of  the  form  is  the  description  of  the 
article  of  which  the  record  is  kept.  The  accounting  section 
includes  four  sets  of  columns.  The  first  set  deals  with  the  number 
of  pieces  ordered  through  the  purchasing  department;  the  second 
set  of  colimms  are  filled  out  from  the  receiving  department's 
memoranda  of  receipts  and  the  stores  requisition  slips,  while  the 
third  set  forms  a  record  of  material  reserved  for  production  orders, 
which  causes  a  draft  on  the  stock  of  material.    Reservation  entries 


1 

« 

JO 

1 
1 

9) 

M 

I  5 

S    8 

s » 

«       0 

°2^ 

"      1 

^ 

oil 

•H 

==■^5 

1       -^ 

s 

o   i 

a 

1 

1 

5  i 

O       0) 

C    -^ 

If 

o    » 

1: 

s 

1^ 

1    t 

1    8 

III 

o  1 

S   5   « 

*:    a 

2  s 

2  r  « 
^  1    1 

5  i 

•5     : 
3     • 

2  ^^ 
It 

1  i 

^fe^ 

?   ^    g 

°2H 

, 

5  B    1 

rr     ^       Ji 

ill        - 

- 

S   3    S 

p.  '^ 

*•   »    « 

i  i 

- 

s  1  ^ 

5   o| 

» -.  § 

1 
i 

§ 

1 

s  i 

2  S 

\  \ 

s  1 

!i 

if 

5    s 

II 

II 

si  1 

Hi 

•a 

i| 

r 

""Iff 

'-'    2     n 

fe^ 

rs  1 

"sl 

fls 

oS  s 

±    ^  s  « 

«  « 

- 1 " 

i  ;» 

i 

© 

■a 

■•» 
o 

R 
1 

2 

a 

i 

5 

5     1 

r  *  3 

o2? 

1   3 

1   5    § 

il| 

2° 

ill 
:  1  * 

•1     •d 

1 

i  1  5 

1 

!:    5    • 

^°^ 

1 :  - 

"-S^ 

g  !  s 

§ii 

1  g  1 

»-s^ 

.  •  1 

. 

^  -  - 

li 

g  1  1 
1  s 

_ 

422 


FACTORY  STATISTICS  423 

are  made  from  the  stores  department's  copy  of  each  production 
order.  The  fourth  set  of  columns  shows  the  balance  on  hand  in 
the  storeroom,  after  deducting  material  in  reserve  for  use  on 
production  orders  already  issued,  but  for  which  the  material  has 
not  yet  been  taken  from  the  storeroom.  Actual  count  of  material 
should  be  made  as  often  as  possible  by  the  storeroom  attendants, 
in  order  to  check  up  the  records. 

Each  day  the  balance-of-stores  clerk  prepares  a  list  of  material 
to  be  inventoried.  The  clerk  from  the  balance-of-stores  depart- 
ment, to  whom  has  been  assigned  the  work  of  perpetual  inven- 
torying, takes  this  list  and  makes  an  actual  count,  shows  the 
balance  on  hand  indicated  on  the  bin  card,  and  makes  his 
returns  to  the  balance-of-stores  clerk,  who  checks  against  his 
stock  records.  This  inventory  work  makes  it  necessary  to  show 
the  last  requisition  authorizing  the  issue  of  the  particular  stock 
item  under  inventory.  An  accurate  check  is  only  rendered  pos- 
sible by  making  reference  to  some  particular  requisition.  A  bin 
ticket  record  system  aids  materially  in  promoting  the  accuracy  of 
the  record  in  the  storeroom  itself.  Each  stock  clerk  must  enter 
his  initials  on  the  bin  tag  every  time  he  takes  out  stock.  This 
feature  has  a  salutary  eiBfect  on  the  accuracy  of  the  storeroom 
clerks  and  tends  to  prevent  them  from  taking  more  material  from 
the  bins  than  is  required,  or  from  allowing  the  surplus  to  lie 
around  the  storeroom.  A  record  of  this  kind  should  not,  how- 
ever, be  made  to  serve  as  a  regular  stock  record,  since  the  data 
is  only  recorded  for  quick  reference. 

This  bin  ticket  contains  spaces  for  the  bin  number,  the  mark 
number  of  the  piece  and  its  name,  date  received  and  symbol. 
At  the  bottom  of  the  card  is  a  statement  of  what  is  to  be  done 
when  the  minimum  quantity  has  been  reached.  Below  the 
general  data  is  the  stock  attendant's  record,  including  columns 
for  date  and  stockman's  initials,  also  columns  headed  "  Amount 
In,"  "  Amount  Out,"  and  "  Amount  Left." 

A  temporary  bin  ticket  can  also  be  used  for  the  purpose  of 
drawing  special  attention  to  those  bins  in  which  the  stock  is 
running  below  the  minimum  quantity,  and  contains  the  same 
information  as  the  regular  ticket,  except  that  it  is  bright  red  in 


424  BUSINESS  STATISTICS 

color.  This  ticket  is  substituted  for  the  regular  one,  the  latter 
being  sent  to  the  storekeeper.  When  the  regular  ticket  is  returned, 
the  red  one  is  attached  to  its  back  and  both  are  hung  on  the  bin 
until  stock  is  brought  up  to  the  required  quantity.  If  the  red 
ticket  alone  hangs  on  the  bin,  then  it  is  known  that  the  store- 
keeper has  been  apprised  of  the  fact,  but  that  the  stock  is  below 
the  danger  mark.  If  both  tags  are  hung  up,  it  is  indicated  that 
the  storekeeper  has  investigated  the  matter  and  that  proper  steps 
are  being  taken. 

The  purchasing  agent  should  be  guided  by  the  specifications 
furnished  by  those  who  have  means  of  knowing  exactly  what  is 
needed.  Such  authorities  should  be  the  manager,  superintendent 
or  storekeeper,  who  should  operate  by  means  of  the  system  of 
requisitions,  orders  and  receipts  of  the  stores  department. 

New  material  should  be  received  at  the  receiving  department, 
where,  by  means  of  a  form,  all  receipts  of  purchased  materials 
are  checked,  and  their  weight  and  number  entered  for  record. 
Under  no  circumstances  should  the  invoice  be  used  as  the  basis 
of  checking.  It  is  a  good  plan  to  make  out  this  form  in  tripli- 
cate, sending  a  copy  to  each  department  interested,  the  original 
to  the  purchasing  department;  the  duplicate  with  the  material 
to  the  storekeeper,  with  the  triplicate  remaining  permanently 
with  the  receiving  clerk.  The  purchasing  agent,  upon  receipt 
of  his  copy,  checks  it  up,  and  forwards  the  original  invoice  to 
the  storekeeper,  who  now  has  a  complete  file  of  forms  in  his 
records,  showing  the  complete  history  of  every  transaction.  These 
forms  should  all  be  in  one  color,  with  the  exception  of  the  dealer's 
invoice.  The  storekeeper  now  possesses  all  information  required 
to  meet  any  disputes  which  may  arise  with  reference  to  the  con- 
dition of  material  when  received,  its  count,  weight,  quality,  price, 
etc.,  before  a  record  is  made  of  these  goods  on  the  stores  cards. 
This  feature  makes  the  record  a  reliable  source  of  reference. 
Finally,  when  the  storekeeper  has  checked  and  signed  all  the  four 
forms,  he  sends  them  to  the  bookkeeping  department  for  auditing. 
The  storekeeper  should  always  bear  in  mind  that  his  department 
is  similar  to  that  of  a  retail  store.  He  orders  material,  through  the 
general  requisition,  from  the  purchasing  agent,  and  then  delivers 


FACTORY  STATISTICS  425 

it  to  the  workmen  over  their  general  supply  and  material  requisi- 
tions. Great  care  should  be  exercised  in  the  issuing  of  materials, 
which  should  never  be  done  except  upon  the  presentation  of  the 
proper  requisition  slip,  signed  by  the  right  authorities  and  prop- 
erly filled  out.  In  all  cases  this  requisition  form,  issued  from  the 
department  requiring  the  material,  must  show  date,  quantity, 
full  description,  the  proper  charge  account,  and  the  signature 
of  the  man  ordering. 

In  supplying  an  order,  the  store  man  issues  the  material  called 
for  on  the  requisition  either  to  the  man  presenting  the  requisition 
or,  in  case  of  large,  bulky  material,  places  it  in  out-going  bins 
plainly  marked  as  to  whom  the  material  is  for,  with  the  job  num- 
ber that  it  applies  to.  If  the  store  man  has  time  when  the  issue 
is  made,  he  should  enter  the  amount  issued,  the  job  number,  and 
the  date  on  the  bin  card,  subtracting  the  amount  issued  from  the 
amount  on  hand,  so  as  to  show  the  balance  on  the  bin  card.  He 
should  then  copy  the  symbol  of  the  material  issued  from  the  bin 
card  on  the  requisition  and  should  show  the  balance  on  the 
requisition,  initialing  this  in  the  space  provided.  But  should  he 
be  too  busy  to  correct  the  bin  card  at  once,  he  should  put  all  the 
requisitions  into  a  box  marked  "  not  worked,'*  until  such  time  as 
he  can  work  them.  After  they  have  been  worked,  they  should  be 
placed  in  a  box  marked  "  worked."  In  the  case  of  material  issued 
many  times  during  the  day,  the  stock  clerk  should  collect  all 
requisitions  calling  for  stock  of  one  kind,  add  them  up  and  make 
one  entry  of  the  total  on  the  bin  card,  showing  the  balance  on  one 
requisition  only.  He  should,  however,  initial  all  requisitions  so 
as  to  show  that  they  have  been  worked  and  included.  These  he 
should  fasten  together  with  the  requisition  that  shows  the  total 
on  top. 

As  soon  as  the  general  supply  or  material  requisition  has  been 
honored,  it  should  be  sent  immediately  to  the  stores  record  office, 
where  the  amount  of  the  material  drawn  should  be  entered  in  its 
proper  place  on  the  stores  card,  the  proper  balance  figured  and 
the  price  entered  on  the  requisition.  After  these  entries  have 
been  made,  the  requisition  should  be  turned  over  to  the  cost 
department. 


426  BUSINESS  STATISTICS 

Some  firms  are  not  so  formal  in  cases  where  stock  parts  are 
being  made  up.  They  provide  a  tag  which  accompanies  the  stock 
order  of  the  individual  parts  through  the  shop.  This  tag  is  pro- 
vided with  a  coupon  which  serves  as  an  order  and  receipt  for  the 
necessary  material.  Thus  no  special  requisition  is  required  to 
draw  material,  but  in  case  of  special  repair  orders,  assembly 
orders,  etc.,  a  material  or  supply  requisition  order  as  mentioned 
above  is  used. 

As  each  requisition  is  extended  and  the  balance  carried  forward, 
the  balance-of -stores  clerk  should  observe  whether  or  not  the  stock 
has  reached  the  minimum.  Upon  this  point  depends  the  auto- 
matic arrangement  of  replenishing  stores  and  he  must  use  his  own 
judgment  in  cases  where  the  balance  is  just  more  than  the 
minimum  quantity,  depending  upon  how  often  and  how  much 
material  is  used.  Provided  the  amount  on  hand,  as  shown  by  the 
balance-of-stores  records,  and  corroborated  by  the  balance  shown 
on  the  last  requisition  received  from  the  storeroom,  is  down  to  the 
minimum,  the  balance-of-stores  clerk  will  make  out  a  requisition 
on  the  purchasing  agent  for  the  maximum  amount,  showing  the 
description  and  all  the  necessary  data.  It  should  be  sent  to 
the  head  of  the  department  using  the  material  called  for.  He 
should  also  make  out  a  "  tickler  "  for  each  requisition  sent  out 
and  should  see  that  it  is  not  held  longer  than  two  days  by  the 
department  to  which  it  has  been  sent.  The  requisition  is  then 
ready  to  go  to  the  executive  head  delegated  to  approve  all 
purchases.  If  the  latter,  after  consideration  of  the  material  on 
order,  deems  it  wise  to  continue  to  carry  the  amount  shown 
in  stock,  he  will  O.  K.  the  requisition  and  forward  it  to  the  bal- 
ance-of-stores clerk.  When  it  has  been  returned,  properly 
signed,  the  balance-of-stores  clerk  should  enter  the  data  on  his 
records  as  "  on  order,''  and  send  the  requisition  to  the  purchasing 
agent,  who  will  place  the  order  and  send  copies  of  the  order  to  the 
balance-of-stores  clerk  and  storekeeper,  and  the  original  to  the 
firm  receiving  the  order.  He  should  also  file  two  copies  in  his  own 
ofiice,  one  numerically,  according  to  the  order  number,  and  one 
alphabetically,  according  to  the  name  of  the  purchaser.  He 
should  also  make  out  a  "  tickler  "  to  be  used  as  a  follow-up  on 
the  order,  to  assure  its  prompt  delivery. 


FACTORY  STATISTICS  427 

In  operating  a  plant,  it  may  often  be  necessary  to  requisition 
out  of  the  stores  a  quantity  of  material  or  supplies  in  bulk  for 
operating  purposes.  For  example,  a  department  may  draw  out 
fifty  pounds  of  brass  rods  for  turning  purposes,  though  only 
twenty-five  pounds  is  used.  It  would,  of  course,  return  the 
remainder  and  must,  therefore,  be  given  credit  for  it.  To  provide 
for  such  cases,  a  special  credit  slip  should  be  provided  for  all 
departments.  It  should  be  remembered  that  a  proper  system 
would  charge  all  material  drawn  from  stores  to  its  proper  ac- 
count within  twenty-four  hours.  Therefore,  if  subsequent  in- 
formation shows  that  more  material  was  drawn  than  was  needed, 
it  is  necessary  to  record  this  fact  and  give  credit  to  the  depart- 
ment or  job  returning  the  surplus  material. 

IV.  The  Perpetual  Inventory  in  Practical  Stores 
Operation  ^ 

By  J.  B.  Green 

Much  has  been  written  concerning  the  principles  of  scientific 
management  but  less  regarding  the  details  of  its  application. 
The  inherent  difficulty  in  attempting  a  discussion  of  this  phase  of 
the  subject  is  the  almost  infinite  variety  of  situations  existing  in 
different  manufacturing  plants,  each  requiring  its  own  special 
treatment.  The  manager  who  is  convinced  that  scientific  man- 
agement is  theoretically  correct,  and  has  come  to  the  conclusion 
that  he  would  like  to  try  it,  is  confronted  with  the  all  important 
question  of  how  to  go  about  it.  There  are  two  general  methods  — 
to  employ  a  professional  industrial  engineer,  or  to  do  it  yourself. 
This  article  is  addressed  to  the  manager  who  has  selected  the 
latter. 

The  word  "  scientific  "  comes  from  a  Latin  root  meaning  "  to 
know,"  and  scientific  management  is  essentially  a  management 
based  on  knowledge  in  distinction  to  one  based  on  guess.  The 
knowledge  which  is  the  basis  of  scientific  management  is  obtained 
usually  in  two  steps,  and  may  be  said  to  consist  of  original  data 

1  Engineering  Magazine,  March,  1915,  pp.  879-888.  Reprinted  by  pennission 
of  Engineering  Magazine. 


428     .  BUSINESS  STATISTICS 

and  derived  data.  For  example,  a  properly  set  task  and  bonus  is 
the  knowledge  of  what  is  a  proper  compensation  for  a  given 
amount  of  work,  and  it  is  derived  from  data  obtained  by  time 
study.  The  cost  of  manufacturing  an  article  is  derived  from 
original  records  regarding  material,  labor,  and  overhead  expense. 
Managers,  as  a  rule,  are  at  least  familiar  with  the  methods  of 
obtaining  such  original  records  as  the  accounting  department  of  a 
scientifically  managed  plant  requires.  It  is  essential  that  the 
plant  be  broadly  divided  into  a  stores  department  and  a  manu- 
facturing department,  and  that  no  transfer  of  goods  of  any  kind 
be  made  from  one  to  the  other  except  on  a  properly  executed 
written  authority.  The  forms  usually  used  are  known  as  "  stores 
issue  cards  "  and  "  stores  credit  sHps.''  It  is  also  necessary  that 
all  manufacturing  be  done  on  authority  of  a  written  factory  order. 
The  purchasing  department  must  be  so  organized  that  all  pur- 
chases are  covered  by  a  written  purchase  order.  The  receipt  of 
all  goods  must  be  reported  on  a  material  received  report.  This 
much  is  required  as  the  basis  for  operating  a  "  Balance-of-Stores 
Record."  It  is  with  the  practical  details  of  operating  such  a 
record  that  this  article  is  concerned. 

Before  passing  to  a  discussion  of  the  subject,  it  is  well  to  realize 
that  all  manufacturing  may  be  divided  into  three  classes,  usually 
designated  as  contract  work,  job  work,  and  standard  product 
manufacturing.  Contract  work  is  done  mostly  outside  of  the 
plant,  as  building  a  bridge  for  example.  Job  work  is  done  within 
the  plant,  but  each  order  is  made  to  the  customer's  specifications. 
Standard  products  are  made  within  the  plant  to  standard  specifi- 
cations and  run  to  stock.  The  business  of  any  single  company 
may  belong  to  any  one  of  these  classes,  or  it  may  be  a  mixture  of 
any  two  or  even  include  all  three.  The  majority  of  manufacturing 
plants  represent  a  mixture  of  job  work  and  standard  product,  and 
it  is  to  this  class  that  special  reference  will  be  made.  With  but  a 
few  modifications,  however,  on  some  points,  the  discussion  would 
apply  to  the  other  classes  as  well. 

Passing  to  the  practical  details  of  installing  and  operating 
a  balance-of-stores  record,  the  first  consideration  is  the  clerk 
required  to  keep  the  record.    In  the  larger  cities,  a  suitable  man 


FACTORY  STATISTICS  429 

for  this  position  can  usually  be  obtained  for  $17  to  $20  a  week.  If 
the  work  is  supervised  in  detail,  it  is  not  necessary  to  pay  more 
than  $12  or  $15  a  week.  The  duties  of  the  balance-of-stores  clerk 
are  herewith  presented  in  specimen  form  and  later  discussed 
in  detail. 

Balance-of-Stores  Clerk's  Duties 

1 .  Superior  Officer.  In  the  performance  of  the  following  duties, 
the  balance-of-stores  clerk  is  under  the  direct  supervision  of  the 
chief  accountant  and  reports  to  him.  He  cooperates  with  those 
making  out  the  original  records  with  which  he  is  concerned  in  the 
matter  of  correcting  errors. 

2.  Divisions  oj  the  Balance-of-Stores  Record.  The  balance-of- 
stores  clerk  keeps  the  record  in  four  divisions,  viz.,  (i)  Raw 
Material,  (2)  Semi-finished  Material,  (3)  Finished  Goods,  and 
(4)  Supplies,  subdividing  these  main  divisions  as  required. 

3.  Original  Records  and  Their  Use,  The  balance-of-stores 
clerk  receives  the  following  forms  from  other  departments  and 
uses  them  as  directed  herewith: 

{a)  Copy  of  Purchase  Order:  —  After  making  the  proper 
entries  in  the  "  ordered  "  column  of  the  balance-of-stores  record, 
the  copy  is  initialed  and  filed  serially  by  order  number. 

Q))  Copy  of  Material-Received  Report:  —  After  making  the 
proper  entries  in  the  "  Received,"  "  Balance,"  and  "  Available  " 
columns  of  the  balance-of-stores  record,  the  copy  is  initialed  and 
filed  by  date. 

(c)  Stores-Credit  Slip:  —  After  making  the  proper  entries  in 
the  "  Received,"  "  Balance,"  and  "  Available  "  columns  of  the 
balance-of-stores  record,  the  slip  is  priced,  initialed,  and  turned 
over  to  the  stores-distribution  clerk. 

{d)  Stores-Issue  Card:  —  After  making  the  proper  entries  in 
the  "  Issued  "  and  "  Balance  "  columns  of  the  balance-of-stores 
record,  the  card  is  priced,  initialed,  and  turned  over  to  the  stores- 
distribution  clerk. 

{e)  Shipping  Order:  —  This  goes  to  the  balance-of-stores  clerk 
before  going  to  the  shipping  department.  Opposite  each  item 
regularly  kept  in  stock,  he  stamps  "'  Applied,"  and  makes  an 


i 

Pi 

i 

o 

8 

1^ 

9 

, 

o 

c 

n 

-    ^ 

1^ 

*< 

g 

< 

M 

O 

S 

•a  6 
1^ 

S9 

o 

O 

5  >> 

W3 

l-s 

^ 

1 

1 

^ 

Q 

u 

e 

•s 

1 

»S 

(l4 

jH 

o 

^^ 

m 

1-2 

s 

< 

Q 

iM 

1 

1^ 

it 

o 

5 

^ 

a 

'6 

M 
^ 

a 

O 

8 

5 
^ 

§ 
^ 

1^ 

9  >> 

g 

J,'43 

1 

1 

< 

Q 

•sii 

1 

1^^ 

1— 1 

oi 

=— 

— 

Nameo 
Unit_ 

1 

l-t 

^ 

1 

Q 

II 

o  ^ 

II 


3 
•1 


FACTORY  STATISTICS  43 1 

entry  in  the  "  Applied  ^'  column  of  the  balance-of -stores  record. 
Opposite  each  item  not  kept  in  stock,  he  stamps  "  Requisitioned,'^ 
and  makes  out  a  requisition  on  the  planning  department  for  the 
goods.  The  shipping  orders  are  then  passed  to  the  shipping 
department. 

(/)  Copy  of  Factory  Order : — After  entering  in  the  "  Ordered  " 
column  of  the  balance-of -stores  record,  the  copy  is  initialed  and 
filed  serially  by  order  number. 

(g)  Invoices  for  Goods  Purchased: — After  entering  the  unit 
price  in  the  price  column  next  to  the  "  Received  "  column  of  the 
balance-of -stores  record,  the  invoice  is  stamped  "  Bal.  of  Strs. 
Clk.,"  initialed,  and  sent  to  the  purchasing  department. 

4.  Use  of  Balance-of -Stores  Sheet,  The  various  spaces  and 
columns  are  filled  in  as  follows: 

(a)  Heading  Spaces:  —  Unit  and  name  are  stated  briefly  but 
plainly.  When  a  new  item  is  added,  the  unit  and  name  are 
obtained  from  the  purchase  order  or  elsewhere  as  occasion 
requires.  The  "  Average  Weekly  Consumption  "  refers  to  the 
quantity  sold  or  otherwise  used  per  week  on  the  average.  This  is 
revised  at  least  once  in  six  months,  or  oftener  if  there  is  a  great 
variation  in  the  rate  of  consumption.  In  the  case  of  seasonable 
items  where  the  average  weekly  consumption  varies  greatly 
during  different  months  of  the  year,  the  proper  average  is 
specified  for  each  season.  The  "  Factory  Time  "  refers  to  the 
time  in  weeks  required  to  manufacture  an  item  plus  a  factor  of 
safety,  making  a  full  allowance  for  the  time  required  to  start  a 
run  after  the  raw  material  is  on  hand.  It  is  determined  by  the 
planning  department.  This  space  applies  to  finished  and  semi- 
finished material  only.  The  "  Classification  Number ''  is  a 
mnemonic  symbol  standing  for  an  item  of  stores.  This  is  devised 
by  the  chief  accountant.  It  is  used  to  index  the  balance-of- 
stores  record.  The  "  Quantity  to  Order ''  is  determined  by  the 
manager  of  the  stores  department.  The  "  Minimum  Stock  " 
space  is  filled  in  as  follows:  —  Case  I;  for  raw  material  kept  in 
stock,  the  minimum  equals  the  time  in  weeks  required  to  obtain 
a  shipment  from  the  source  of  supply,  multiplied  by  the  average 
weekly  consumption.    Case  II;  for  finished  goods  for  which  raw 


432  BUSINESS  STATISTICS 

material  is  specially  ordered,  the  minimum  equals  the  product  of 
the  average  weekly  consumption,  the  sum  of  the  factory  time, 
and  the  time  in  weeks  required  to  obtain  a  shipment  from  the 
source  of  supply.  Case  III;  for  finished  goods  for  which  raw 
material  is  kept  in  stock,  the  minimum  equals  the  factory  time 
multiplied  by  the  average  weekly  consimiption.  Case  IV;  for 
supplies,  the  minimum  equals  a  specified  quantity  determined  as 
directed  by  the  manager  of  the  stores  department. 

(b)  "Ordered"  Column:  —  The  date,  quantity,  and  order 
number  are  posted  from  the  purchase  order  or  factory  order, 
depending  on  whether  the  material  is  purchased  from  outside  or 
made  in  factory. 

(c)  "Received"  Column:  —  The  date,  quantity  and  order 
nimiber  are  posted  from  material-received  reports  or  stores- 
credit  slips,  depending  on  whether  the  material  is  received  into 
stock  from  an  outside  source  or  from  the  factory.  The  price  is 
obtained  from  the  invoice  or  the  cost  clerk,  depending  on  the 
same  circumstances. 

{d)  "Issued"  Colunrn: — The  date,  quantity,  and  order 
number  are  posted  from  the  issue  cards, 

(e)  "Balance  on  Hand"  Colimin:  —  Every  entry  in  the 
"  Issued  "  column  is  subtracted  from  the  last  balance  and  the 
difference  and  date  entered.  The  cost  price  is  entered  after  every 
receipt  of  goods.  If  this  fluctuates  violently,  the  price  is  reviewed 
by  the  manager  of  the  stores  department  before  entry.  He  may 
assign  an  arbitrary  average  price. 

(/)  "Applied  on  Orders"  Column:  —  This  column  is  used 
only  in  connection  with  finished  goods.  Entries  are  made  from 
the  Shipping  Orders  covering  regular  stock  items,  the  date  and 
quantity  being  posted. 

(g)  "  Available  "  Colimin:  —  Every  entry  in  the  "  Applied  on 
Orders  "  column  is  subtracted  and  the  difference  and  date  posted. 
Every  entry  in  the  "  Received  "  column  is  added  and  the  sum 
and  date  posted. 

(h)  "  Remarks  "  Column:  —  This  is  used  as  the  name  implies. 

(i)  Lining  up  Columns:  —  In  order  to  keep  track  readily  of 
various  related  items,  the  double  lines  immediately  following  the 


FACTORY  STATISTICS  433 

quantity  columns  are  Kned  in.  Whenever  an  order  has  been  re- 
ceived complete,  the  space  in  the  "  Ordered  ^'  and  "  Received  " 
columns  referring  to  this  order  are  lined  off.  The  same  procedure 
is  followed  between  "  Issued  ''  and  "  Applied  on  Orders  "  columns 
when  the  latter  is  kept. 

(j)  Checking  Columns: — The  narrow  spaces  immediately- 
following  the  double  lines  after  the  "  Quantity ''  columns  are 
used  for  checking  purposes. 

5.  Maximum  and  Minimum.  The  balance-of-stores  clerk 
knows  that  it  is  time  to  replenish  stock  whenever  the  sum  of 
goods  on  order  and  on  hand  or  available  becomes  less  than  the 
prescribed  minimum.  A  requisition  is  issued  for  the  specified 
quantity  to  order,  and  sent  to  the  purchasing  department  in  the 
case  of  supplies  and  raw  material,  and  to  the  planning  department 
in  the  case  of  semi-finished  and  finished  goods. 

The  above  represents  a  statement  of  the  balance-of-stores 
clerk's  duties  in  such  form  as  they  might  be  issued  to  him  by  the 
chief  accountant  or  other  officer.  Taking  up  the  various  sections 
of  these  duties  one  at  a  time  for  discussion,  the  first  relates  to  the 
superior  officer.  The  balance-of-stores  clerk  is  under  the  chief 
accountant's  supervision,  because  the  work  is  essentially  account- 
ing and  is  so  closely  related  to  other  features  of  a  general  account- 
ing system  that  it  must  be  under  the  same  supervision. 

The  second  section  refers  to  the  division  of  the  record.  All 
materials  handled  by  a  manufacturing  company  may  be  divided 
into  four  main  classes,  raw,  semi-finished,  finished,  and  suppKes. 
The  balance-of-stores  record  should  have  at  least  these  divisions 
and  further  subdivisions  as  the  nature  of  the  business  demands. 
These  same  divisions  are  usually  made  in  storing  materials,  in 
reporting  an  inventory,  in  cost  accounting,  and  numerous  other 
places,  and  should,  therefore,  be  used  in  connection  with  the 
record  so  that  it  will  harmonize. 

The  third  paragraph  is  concerned  with  original  records  and 
their  use.  The  balance-of-stores  clerk  requisitions  the  purchasing 
department  for  material  required  and  receives  back  a  copy  of  the 
purchase  order  as  acknowledgment  and  advice  regarding  the 
date  ordered  and  the  order  number.     This  latter  is  useful  in 


434  BUSINESS  STATISTICS 

checking  the  goods  off  against  the  proper  order  when  received. 
The  balance-of-stores  clerk's  copy  of  the  purchase  order  is  filed 
serially  so  as  to  form  a  cross  index  with  the  purchasing  depart- 
ment's copy,  which  should  be  filed  alphabetically.  All  original 
records  should  be  initialed  as  soon  as  posted  to  indicate  that  the 
proper  entries  have  been  made.  A  copy  of  the  "  Material- 
Received  Report "  is  essential  to  keep  the  record  in  balance.  It  is 
filed  by  date  because  a  freight  bill,  or  other  record,  may  give  only 
the  date,  or  approximate  one,  on  which  an  item  of  material  was 
received  and  this  system  of  filing  makes  it  easier  to  locate  reports. 
The  record  itself  furnishes  a  cross  index  by  order  number  or  name 
of  item. 

The  "  Stores-Credit  Slip  "  is  the  authority  to  return  goods  to 
stock  from  the  manufacturing  departments.  The  quantity  should 
be  recorded  in  the  "  Received  "  column  and  added  to  the  "  Bal- 
ance "  and,  in  the  case  of  finished  goods,  to  the  "  Available  " 
colmnn.  It  is  priced  at  cost  and  turned  over  to  the  stores  dis- 
tribution clerk,  who  summarizes  these  and  the  stores-issue  cards 
and  keeps  a  running  inventory  in  dollars  and  cents  of  the  stock  on 
hand.  This  is  necessary  in  order  to  close  the  general  books  once 
a  month  so  as  to  derive  a  monthly  profit  and  loss  showing.  The 
credit  slips  and  issue  cards  are  eventually  turned  over  to  the  cost 
clerk,  who  files  them  permanently  by  order  number  or,  if  they 
refer  to  an  item  of  overhead  expense,  by  account  symbol. 

The  stores-issue  card  is  handled  the  same  as  a  credit  slip  except 
that  it  represents  an  issue  of  stock  to  the  manufacturing  depart- 
ments, instead  of  a  credit. 

The  balance-of-stores  clerk  receives  the  shipping  order  to 
requisition  the  planning  department  for  items  not  in  stock,  and  to 
keep  the  quantity  available  continuously  up  to  date.  This  makes 
it  possible  to  advise  the  sales  department  at  any  time  just  how 
much  of  any  item  is  available  for  sales. 

The  balance-of-stores  clerk  should  receive  a  copy  of  the  factory 
order,  for  reasons  similar  to  those  given  in  the  case  of  a  purchase 
order.  In  one  case  the  material  is  bought  from  an  outside  source, 
and  in  the  other  from  the  manufacturing  departments. 

After  an  invoice  for  goods  purchased  has  been  paid,  it  should  go 
to  the  balance-of-stores  clerk  so  that  he  may  enter  the  price. 


FACTORY  STATISTICS  435 

This  should  be  done  from  the  paid  invoice  in  order  to  include  any 
price  adjustments.  The  price  invariably  should  be  reduced  to  the 
same  unit  as  that  in  which  the  stock  is  recorded  in  the  record. 

The  paragraph  concerned  with  the  use  of  the  balance-of -stores 
sheet  probably  requires  explanation  on  only  a  few  points.  The 
"  Classification  Number  "  is  essentially  an  abbreviation  for  the 
name  of  an  item  of  stock.  It  may  be  composed  of  figures,  letters, 
or  a  mixture  of  both.  For  a  complete  discussion  of  this  subject, 
reference  should  be  made  to  literature  on  the  subject.  These 
symbols  serve  the  purpose  of  translating  shop  names  to  those 
used  by  the  accounting  department,  as  a  basis  for  setting  depre- 
ciation rates,  as  an  aid  in  sorting  the  cards  for  posting  to  the 
record,  and  for  resorting  by  the  stores  distribution  clerk,  etc.  The 
question  of  devising  and  using  mnemonic  classification  symbols 
is  a  subject  too  broad  to  more  than  hint  at  here.  The  "  Quantity 
to  Order  "  and  "  Minimmn  "  will  be  discussed  later  in  connection 
with  the  paragraph  "  Maximum  and  Minimum."  The  "  Avail- 
able "  and  "  Applied  on  Orders  "  columns  may  serve  a  variety  of 
purposes  depending  on  the  nature  of  the  business.  Uses  for  these 
columns  will  readily  suggest  themselves.  In  the  above  statement 
of  the  balance-of-stores  clerk's  duties  these  colimins  are  used  only 
in  connection  with  finished  goods,  but  under  certain  conditions 
they  might  prove  of  greater  benefit  with  one  or  all  of  the  other 
classes  of  material.  The  essential  thing  in  operating  these 
colimins  is  to  have  all  authorities  for  the  issue  of  stock  from  the 
stores  department  cross  the  balance-of-stores  clerk's  desk  first,  be 
entered  and  stamped  "  applied."  Unless  this  is  done,  some  stock 
will  be  issued  without  being  first  applied  on  orders  which  will,  of 
course,  vitiate  the  benefits  of  keeping  these  columns. 

Passing  to  the  next  paragraph,  the  proper  setting  of  the 
maxima  and  minima,  and  the  operating  of  this  feature  is  the  most 
important  part  of  a  balance-of-stores  record.  When  the  balance 
on  hand  plus  the  quantity  on  order  equals  the  specified  minimum, 
more  stock  should  be  requisitioned.  This  minimum  should  be  so 
set  that. the  fresh  supply  comes  in  just  before  the  old  stock  is 
exhausted.  In  order  to  set  such  a  minimum  for  an  item  of  stock, 
it  is  necessary  to  examine  the  factors  which  affect  the  exhaustion 


436  BUSINESS  STATISTICS 

and  replenishing  of  stock.  These  are  .twelve  in  number  when  all 
possible  cases  are  covered.  However,  it  is  rarely  necessary  to 
consider  more  than  three  or  four  in  any  particular  instance.  Fol- 
lowing are  the  twelve  factors,  the  unit  of  time  being  the  week  and 
the  unit  of  quantity  that  one  decided  on  as  the  standard  for  the 
balance-of-stores  record : 

(a)  Time  required  by  the  purchasing  department  to  place  an 
order  after  receiving  a  purchase  requisition  from  the  balance-of- 
stores  clerk. 

(b)  Time  required  by  the  seller  to  ship  the  goods  after  receipt 
of  the  purchase  order. 

(c)  Time  required  in  transit. 

(d)  Time  required  to  pass  goods  through  the  receiving  room 
and  to  the  desired  point  in  the  manufacturing  department. 

(e)  Time  required  to  manufacture  goods. 

(/)  Time  required  to  ship  goods  after  being  manufactured. 

(g)  Time  required  as  a  factor  of  safety. 

(h)  Average  quantity  consumed  per  week. 

(i)  Balance  on  hand. 

(J)  Quantity  on  order. 

{k)  Maximum  quantity  that  a  single  order  might  require. 

Let  L  =  the  allowable  minimmn  quantity.  Using  the  letters 
indicated  above,  the  sum  {a  +  b-{-c-{-d-\-e-]-f  +  g)  equals 
the  time  in  weeks  required  to  secure  the  raw  material  and  manu- 
facture a  lot  ready  for  shipment.  This  siun  multiplied  by  h  gives 
the  quantity  sold  during  the  time  required  to  replenish  the  stock. 
It  might,  therefore,  be  expected  that  if  the  balance-of-stores  clerk 
made  out  a  requisition  on  the  purchasing  department  for  raw 
material  when  this  quantity  was  left  on  hand,  the  new  lot  would 
be  ready  just  as  the  old  lot  was  used  up.  There  must,  however, 
always  be  enough  on  hand  to  fill  the  maximum  order  that  might 
be  expected,  so  the  factor  k  is  added.  It  often  happens  that  the 
quantity  to  order  is  small  and  the  time  required  to  obtain  raw 
material  is  long.  In  such  cases,  the  factory  must  be  subtracted. 
The  complete  general  formula  then  becomes, 

L  =  {a-]-b  +  c  +  d  +  e+f+g)h  +  k  -y, 


FACTORY  STATISTICS  437 

and  a  requisition  should  be  put  through  as  soon  as  L  becomes  less 
than  i.  It  is  not  necessary  for  the  balance-of-stores  clerk  to  figure 
an  elaborate  formula  of  this  kind.  When  all  of  the  quantities, 
a,  b,  c,  d,  e,f,  g,  h,  k,  remain  constant,  or  nearly  so,  over  a  period  of 
time  such  as  a  year,  the  formula  need  be  figured  but  once  and 
the  minimum  specified  on  the  record  as  a  number.  When,  how- 
ever, one  or  more  of  these  quantities  varies  enough  to  warrant  the 
extra  work  on  the  part  of  the  balance-of-stores  clerk,  the  formula 
should  be  specified  on  the  record,  using  words  instead  of  letters 
as  very  few  clerks  will  readily  comprehend  the  significance  of 
algebraic  symbols. 

Referring  back  to  the  specimen  duties  of  the  balance-of-stores 
clerk,  paragraph  4,  Case  I,  the  quantity  b  is  regarded  as  varying 
so  that  it  must  be  considered.  This  would  be  true  for  instance 
in  case  bar  steel  were  the  raw  material.  This  sometimes  may  be 
had  from  the  mills  in  two  weeks  and  sometimes  it  requires  six 
months.  It  is  obvious  that  it  would  be  foolish  always  to  keep 
a  six  months'  supply  on  hand  and  yet  the  supply  must  come  in 
regularly.  This  is  accomplished  by  having  the  purchasing  depart- 
ment make  monthly  or  semi-monthly  reports  to  the  balance-of- 
stores  clerk  regarding  the  time  it  takes  to  get  delivery.  The 
purchasing  department  is  Instructed  to  add  a  factor  of  safety 
which  shall  cover  the  quantities  a  and  c  as  well  as  g.  The  balance- 
of-stores  clerk  should  periodically  compute  h  on  all  items  and 
make  such  corrections  as  are  required.  The  quantity  k,  so  far  as 
these  specimen  duties  are  concerned,  is  considered  very  small  and 
may  therefore  be  neglected.  The  quantity 7  does  not  often  enter 
into  the  calculation,  and  when  it  does  is  considered  by  specifying 
that  a  requisition  should  be  put  through  when  the  sum  of  the 
goods  on  hand  and  on  order  becomes  less  than  the  prescribed 
minimum.  It  will  thus  be  seen  that  this  apparently  complicated 
formula  has  resolved  itself  for  the  case  in  point  into  a  considera- 
tion of  but  two  quantities.  After  the  balance-of-stores  clerk  has 
figured  a  few  items  by  this  method,  he  can  usually  tell  at  a  glance 
whether  a  requisition  should  be  put  through.  The  person  setting 
the  minima  should  make  himself  very  famihar  with  the  theoreti- 
cal formula  as  given  above  and  should  reduce  this  to  simple  terms 


438  BUSINESS  STATISTICS 

covering  specific  cases  which  may  be  practically  applied  by  the 
balance-of-stores  clerk.  The  case  given  is  but  an  example.  There 
are  probably  several  hundred  different  ways  in  which  this  formula 
may  be  reduced  for  practical  application.  By  its  intelligent  use, 
however,  it  is  possible  to  keep  but  a  relatively  small  amount  of 
stock  on  hand  and  at  the  same  time  always  be  sure  of  an  adequate 
supply. 

The  maximum  is,  of  course,  the  sum  of  the  minimum  quantity 
and  the  quantity  to  order.  The  quantity  to  order  is  dependent 
on  five  factors.    These  are  as  follows: 

P  =  Average  weekly  consumption. 

Q  =  Set-up  cost  plus  loss  of  profit,  if  any,  due  to  idleness  of 
machine. 

R  =  Shop  cost  (except  preceding  item)  per  unit. 

S  =  Rate  of  interest  plus  rate  of  depreciation,  both  per  week. 

T  =  Storage  charges  per  unit  per  week. 

Then  let  X  —  Quantity  to  order. 

It  is  evident  that  it  costs  as  much  to  get  ready  to  make  a  run 
of  goods  if  only  one  piece  is  made  as  if  a  thousand  are  made,  or 
ten  thousand,  or  whatever  quantity  can  be  turned  out  without  re- 
setting a  die  or  making  other  changes.  Consequently,  the  more 
goods  that  can  be  manufactured  in  one  lot,  the  lower  will  be  the 
cost.  Suppose,  however,  as  is  usually  the  case,  that  these  goods 
must  be  stored  in  the  warehouse  for  some  time  until  sold.  There 
is  an  expense  occasioned  for  warehouse  space,  money  is  tied  up,  the 
interest  on  which  should  be  charged  against  the  goods,  and  there 
is  usually  a  loss  through  depreciation.  Thus,  so  far  as  storing  the 
goods  is  concerned,  the  more  made  at  a  time,  the  higher  the  cost. 
Here  are  two  forces,  so  to  speak,  pulling  in  opposite  directions. 
There  must,  therefore,  be  some  point  where  the  cost  is  a  minimum. 
If  the  quantity  run  be  smaller  than  this  amount,  the  increased  cost 
per  imit,  due  to  distributing  the  set-up  charges  over  fewer  pieces, 
more  than  offsets  the  reduction  in  cost  of  warehousing.  On  the 
other  hand,  if  the  quantity  run  be  greater  than  this  minimum,  the 
warehouse  expense  more  than  offsets  the  saving  in  manufacturing 
cost.  That  branch  of  mathematics  known  as  calculus  makes  it 
possible  to  determine  the  formula  which  expresses  the  proper 


FACTORY  STATISTICS  439 

quantity  to  order  so  that  the  sum  of  the  manufacturing  and  ware- 
house expenses  shall  be  a  minimum.  Expressed  algebraically 
this  formula  is 

^  -\RS  +  T 

Thus,  to  find  out  the  proper  quantity  to  order  in  any  particular 
case,  it  is  merely  necessary  to  substitute  the  proper  figures  and 
solve  the  problem  by  ordinary  arithmetic.  No  knowledge  of 
either  calculus  or  algebra  is  required  to  use  this  formula.  Great 
care,  however,  should  be  taken  in  getting  the  units  correct.  The 
same  unit  of  quantity  must  be  used  for  P,  R,  S,  and  T.  Costs 
must  be  written  as  dollars  and  decimal  parts  of  a  dollar.  For 
instance,  if  the  shop  costs  is  6  2/10  cents  per  unit,  it  must  be 
written  $.062.  If  the  proper  care  is  taken  regarding  the  units  of 
quantity  and  money,  it  is  a  comparatively  simple  matter  to  figure 
the  right  size  run  to  make  on  each  item  so  as  to  give  the  maximum 
economy.  This  formula  will  be  found  of  greatest  service  in  con- 
nection with  expensive,  bulky,  perishable  goods,  with  a  high  set- 
up charge,  and  of  least  service  when  the  reverse  is  the  case. 

V.  The  Stores  Department  * 

By  George  C.  Yeomans 

The  investment  of  the  average  railroad  in  unused  material  is 
rapidly  increasing.  In  fifteen  years  it  has  increased  283  per  cent. 
This  rate  is  out  of  all  proportion  to  the  increase  in  any  of  the  units 
of  operation  which  render  a  stock  of  material  necessary. 

The  official  figures  of  the  Interstate  Commerce  Commission 
show  the  following  increases  to  have  taken  place  during  the  same 
period : 

Miles  of  track 5°  per  cent. 

Freight  car  miles  (10  years) 50  per  cent. 

Total  car  miles  (partly  estimated) 57  per  cent. 

No.  locomotives  in  service 70  per  cent. 

No.  cars  in  service 82  per  cent. 

Tons  moved 167  per  cent. 

1  Railway  Age  Gazette,  vol.  59,  pp.  237-238.  Reprinted  by  permission  of 
Railway  Age  Gazette. 


440  BUSINESS  STATISTICS 

Reduced  to  a  "  per  mile  of  track  "  basis,  the  percentage  of 
increase  is  as  follows : 

Unused  material 155  per  cent. 

Freight  car  miles  (10  years) 10  per  cent. 

Total  car  miles  (partly  estimated) 15  per  cent. 

No.  locomotives  in  service 14  per  cent. 

No.  cars  in  service 21  per  cent. 

Tons  moved  one  mile 77  per  cent. 

Why  this  enormous  discrepancy  in  the  growth  of  the  fixed 
investment  in  material  ? 

It  must  be  distinctly  borne  in  mind  that  this  is  not  an  increase 
in  the  amount  of  material  used,  but  in  the  amount  of  material 
that  is  not  used  and  which  represents  a  practically  permanent 
investment. 

This  distinction  is  important.  Consumption  of  material  should 
be  expected  to  increase  in  greater  ratio  than  the  units  of  opera- 
tion referred  to,  because  railroad  operations  themselves  have 
greatly  increased,  both  in  magnitude  and  complexity.  But  a 
stock  of  material  should  not  increase  in  direct  proportion  to 
the  amount  consumed,  and,  while  it  could  not  perhaps  be 
altogether  limited  to  the  same  ratio  of  increase  as  those  units 
with  which  it  is  here  compared,  it  is  reasonable  to  assume  that 
so  great  a  difference  is  wholly  unwarranted. 

It  is  unfortunate  that  more  exact  information  on  this  subject 
is  not  procurable.  The  units  with  which  comparison  is  insti- 
tuted are  not  those  of  choice,  but  of  necessity,  and  the  com- 
parison is  therefore  crude,  but  the  discrepancy  between  cause  and 
effect  is  so  tremendous  as  to  demand  serious  consideration. 

I  do  not  know  a  railroad  executive  who  will  not  admit  that  this 
investment  is  larger  than  it  should  be,  and  who  is  not  trying  in 
some  way  to  curb  it,  but  it  is  evident  that  the  average  way  is  not 
the  right  way,  for  the  disproportionate  increase  continues.  A 
detailed  examination  of  this  situation  on  ten  representative 
railroads  in  various  parts  of  the  country,  coupled  with  results 
actually  obtained  in  several  cases,  point  to  the  conclusion  that 
this  investment  is  nearly  twice  as  large  as  is  necessary  on  the 
average  railroad. 


FACTORY  STATISTICS  44 1 

The  amount  of  capital  thus  impounded  is  reported  as  $240,- 
000,000,  and  this  is  undoubtedly  the  minimum.  If  40  per  cent 
of  this  money  could  be  recovered,  there  would  be  $100,000,000 
more  of  free  capital  to  employ  for  other  purposes. 

Analyzed  further,  this  means  that  the  railroads,  collectively, 
have  unconsciously  expended  $100,000,000  for  which  no  real 
necessity  existed.  True,  it  is  not  lost.  The  material  which  it 
represents  will  be  used  some  day  or,  at  least,  most  of  it;  but  it  is 
idle  capital  and  that  means  expensive  capital.  When  locked  up 
in  stocks  of  material  the  carrying  charges  are  seldom  less  than 
1 5  per  cent,  and  frequently  as  high  as  20  per  cent.  Thus  a  further 
expense  of  some  $15,000,000  or  $20,000,000  is  caused,  which  is 
wholly  unnecessary. 

Why  do  such  conditions  exist,  and  what  is  the  remedy  ? 

Two  principal  causes  contribute  to  this  economic  waste  and 
prevent  its  correction. 

1.  Absence  of  exact  information  regarding  the  handling  of  this 
large  investment. 

2.  A  reluctance  to  depart  from  long  established  precedents  and 
customs. 

It  has  come  to  be  generally  accepted  that  the  first  step  toward 
positive  control  of  this  large  investment  is  the  creation  of  an 
organization  to  which  can  be  entrusted  the  care  and  handling 
of  the  stocks  and  the  collection  of  accurate  data  concerning 
them. 

Following  the  example  of  the  pioneers  in  this  reform  a  majority 
of  the  railroads  have  instituted  a  "  Stores  "  department,  but,  as 
a  rule,  have  placed  it  in  charge  of  employees  whose  previous  train- 
ing has  all  been  along  the  lines  of  former  practice  and,  through 
an  imperfect  conception  of  the  basic  principles  underlying  the 
effectiveness  of  such  an  organization,  they  have  condemned  all 
departures  from  precedent  and  expected  different  results  without 
employing  different  methods. 

Under  such  conditions  the  work  of  the  new  department  has 
been  perfunctory  and  superficial,  for  no  matter  how  those  in 
charge  of  it  may  strive,  they  are  bound  by  the  dictates  of  prec- 
edent and  custom.    They  must  also  contend  against  a  natural 


442  BUSINESS  STATISTICS 

jealousy  over  what  has  come  to  be  regarded  as  a  "  vested  right  " 
of  the  individual  or  the  department  in  the  material  they  use  and 
an  equally  natural  resentment  of  what  is  construed  to  be  an 
abridgment  of  long  enjoyed  authority. 

The  insignificance  of  the  results  obtained  under  these  conditions 
creates  a  disbelief  in  the  efficacy  of  the  remedy. 

The  methods  of  controlHng  the  investment  in  material  are  the 
only  ones  that  have  stood  still,  on  the  average  railroad,  since  its 
inception.  They  are  essentially  the  same  today  as  when  the 
"  Stourbridge  Lion  "  made  its  first  trip. 

The  efforts  at  improvement  have  been  mainly  directed  to 
facihties  for  the  physical  handling  of  the  material,  which  have 
an  important  effect  on  the  labor  cost,  but  none  at  all  on  the 
amount  of  the  investment;  unless,  possibly,  still  further  to 
increase  it. 

It  is  hard  to  understand  why  we  cling  so  tenaciously  to  cus- 
toms which  have  produced  the  very  condition  which  we  seek  to 
correct,  and  bHndly  follow  precedents  established  under  circum- 
stances that  no  longer  exist;  but  until  we  realize  that  they  have 
outlived  their  usefulness  and  are  ready  to  discard  them  in  favor 
of  methods  which  are  better  adapted  to  the  changed  conditions 
of  modem  railroad  operation,  this  unproductive  and  costly 
investment  will  continue  to  increase. 

The  only  methods  by  which  the  stock  of  material  on  a  railroad 
can  be  controlled  are  the  same,  in  all  essential  particulars,  as  those 
employed  by  any  large  and  successful  department  store  or  mail 
order  house.  The  same  basic  principles  apply  in  both  cases.  It 
is  purely  a  conomercial  problem,  not  one  of  operation  or  engineer- 
ing. There  must  be  the  same  precision  of  method,  the  same  accu- 
racy of  data,  that  are  necessary  to  the  profitable  conduct  of  any 
commercial  business.  The  law  of  averages  holds  just  as  good  in 
the  consumption  of  material  for  the  ordinary  maintenance  and 
operation  of  a  railroad  as  in  any  other  field  of  human  endeavor, 
and  this  law  should  be  intelligently  applied  in  procuring  and 
limiting  the  supplies  for  such  work,  but  the  averages  must  be 
founded  on  precise  and  comprehensive  knowledge,  and  not  on 
estimates  or  imperfect  or  incomplete  information. 


FACTORY  STATISTICS  443 

VI.  Time  Stxjdy  and  Task  Work  Explained  ^ 
By  Sanford  E.  Thompson 

The  primary  object  of  scientific  methods  of  management  is  to 
increase  the  productive  capacity  of  a  man  or  of  a  machine  to 
reduce  eventually  the  cost  of  the  product  to  the  consumer  and  at 
the  same  time  to  increase  the  remuneration  of  the  worker.  This 
must  be  accomplished  not  by  mere  speeding  up.  It  must  be  done 
by  so  arranging  the  work  of  the  man  as  to  eliminate  the  unneces- 
sary operation  and  the  waste  time  and  teach  him  to  perform  each 
necessary  operation  in  the  best  manner  possible.  It  must  be  done 
by  standardizing  the  running  of  the  machine  so  as  to  fit  each  one, 
as  regards  speed,  accuracy  and  constancy  of  operation,  for  the 
particular  work  it  has  to  do. 

The  primary  defect  in  the  common  types  of  management,  how- 
ever comprehensive  they  may  be  as  regards  organization,  Ues  in 
the  lack  of  application  of  scientific  methods.  There  is  a  lack 
of  methods  which  start  at  the  bottom,  thoroughly  study  each 
element  in  the  process,  and  then  finally  adopt  a  comprehensive 
plan  of  management  coordinating  all  the  details  and  all  the  proc- 
esses in  the  plant  to  produce  one  effective  working  combination, 
with  the  functions  of  each  individual  definitely  designated. 

This  scientific  method,  the  method  of  starting  at  the  bottom, 
analyzing  operations  and  standardizing  all  implements  and 
machines,  is  difficult;  it  is  slow;  it  is  costly  at  the  beginning.  The 
problem  to  consider,  then,  is  whether  it  will  produce  permanent 
results  that  will  pay  in  the  long  run  better  than  daywork  or  piece- 
work or  the  premium  plan  as  commonly  employed. 

Let  us  contrast  for  a  moment  the  usual  plan  of  fixing  piece-rates 
with  the  time  study  method.  The  foreman  and  superintendent 
get  together,  look  over  records  and  compare  cost  records  of  past 
performances,  and  then  guess  at  the  speed  at  which  they  think  a 
man  ought  to  do  the  job.  In  probably  ninety-nine  cases  out  of 
one  hundred  this  guess  will  be  wrong.    If  the  rate  is  too  low  the 

^  Iron  Age,  April  24,  1913,  pp.  1010-1012.    Reprinted  by  permission  of  Iron 

Age. 


444  BUSINESS  STATISTICS 

men  will  fail  to  earn  usual  day  wages,  and  a  strike  is  probable.  If, 
as  is  more  apt  to  be  the  case,  the  rates  are  too  high  the  men  soon 
speed  up  and  earn  more  than  the  management  thinks  they  are 
entitled  to.  Immediately  the  rate  is  cut  and  the  same  operation 
is  repeated.  After  one  or  two  transactions  of  this  kind  the  men 
see  that  it  is  useless  to  try  to  earn  a  big  wage,  and  when  a  new  rate 
is  set,  they  fix  among  themselves  a  definite  output  per  day  that 
will  give  them  the  highest  wage  that  the  management  will  pay. 
This  is  no  mere  theory  but  is  almost  universal  practice  in  piece- 
work shops. 

How,  then,  do  methods  of  scientific  time  study  for  rate-fixing 
differ  in  principle  from  the  ordinary  plan  of  comparing  cost 
records  ?  The  taking  of  records,  the  finding  how  long  it  has  taken 
a  man  or  a  woman  to  do  a  certain  piece  of  work,  is  as  old  as  the 
hills.  Records  of  outputs  on  the  various  machines  are  given  in 
every  factory.  The  obtaining  of  such  records,  however,  is  not 
time  study. 

Let  us  take  for  an  illustration  the  making  and  erecting  of  forms 
or  molds  for  reenforced  concrete  buildings  —  the  forms  into  which 
the  semi- liquid  concrete  is  poured  in  order  to  mold  it  to  the  proper 
dimensions  for  columns,  beams  and  slabs.  The  cost  of  forms  is 
ordinarily  figured  either  in  terms  of  per  cubic  yard  of  concrete  or 
else  in  terms  of  per  square  foot  of  surface  area.  Neither  method 
is  accurate.  Take  one  of  the  simplest  processes,  the  making  up 
of  a  side  for  a  column  form.  The  side  of  a  column  form  consists 
simply  of  a  panel  made  up  of  lengths  of  boards  or  planks  with 
wooden  cleats  nailed  across  them  at  intervals.  The  cleats  are 
placed  upon  the  work-bench,  the  boards  or  planks  are  placed 
across  the  cleats  and  nails  are  driven  to  fasten  the  cleats  to  the 
boards. 

Suppose  in  one  case  we  have  a  form  or  panel  for  one  side  of  a 
column  12  in.  square.  Suppose  in  another  case  we  have  a  similar 
form  for  a  column  24  in.  square.  How  shall  we  determine  the 
difference  in  cost  ?  Based  on  terms  of  the  cubic  yards  of  concrete 
in  the  column,  the  cost  of  the  form  for  the  24-in.  column  should  be 
four  times  as  much  as  for  the  1 2-in.  Based  on  surface  area,  the 
cost  for  the  24-in.  should  be  twice  that  of  the  12-in.    As  a  matter 


FACTORY  STATISTICS  445 

of  fact,  the  time  of  the  24-in.  would  be  only  a  little  over  one-third 
more  than  12  in.  for  making  up,  with  even  a  less  difference  than 
this  for  the  other  operation  of  setting  up  and  removing.  Other 
parts  of  the  work  will  be  governed  by  still  different  ratios,  so 
different,  in  fact,  that  it  is  absolutely  impossible  to  figure  accurate 
costs  or  set  tasks  by  any  system  of  cost  records. 

Time  study  does  it  in  this  way.  It  takes  the  times  of  the  ele- 
mentary or  unit  operations  of  the  man  who  makes  the  form.  It 
finds  out  how  long  it  takes  him  to  place  one  cleat  on  the  bench. 
It  finds  how  long  it  takes  to  place  the  finished  form  on  the  pile. 
It  finds  how  long  it  takes  to  put  a  single  board  or  plank  on  the 
bench.  It  finds  out  how  long  it  takes  him  to  drive  one  nail.  By 
taking  a  lot  of  observations  on  each  unit  and  allowing  a  definite 
fixed  percentage  for  the  necessary  rest  it  is  possible  from  such 
unit  observations  as  these  to  determine  the  time,  and  there- 
fore the  cost,  for  making  up  forms  of  any  shape  and  size.  If  a 
certain  form  has  more  cleats,  the  unit  time  per  cleat  must  simply 
be  multiplied  by  the  extra  number.  If  more  individual  boards, 
the  time  per  board  by  a  different  number  of  boards.  If  more  nails, 
the  time  per  nail  by  a  different  number  of  nails.  By  such  proc- 
esses as  these  it  has  been  found  possible  to  make  up  accurate 
tables  for  times  and  costs  of  forms  of  all  lengths  and  sizes  and 
shapes.  By  the  other  method  of  over-all  times,  a  separate  obser- 
vation would  have  had  to  be  made  on  every  different  length, 
width,  type  and  design.  Records  on  one  job  would  have  been 
absolutely  worthless  for  another  or  even  for  the  same  job  under 
different  conditions. 

The  same  principles  apply  to  other  classes  of  work  in  the  shop 
or  in  construction.  Time  study  not  only  shows  the  time  in  which 
the  work  should  be  done  but  it  also  assists  in  standardizing  the 
methods  and  the  implements.  In  connection  with  the  making  of 
forms,  for  example,  it  was  found  by  time  study  that  a  certain  type 
of  hammer  was  better  than  any  other.  It  was  found  that  a  certain 
method  of  erecting  the  forms  was  considerably  cheaper  than  any 
other  plan.  It  was  found  that  the  number  and  size  of  nails,  which 
ordinarily  varied  with  each  individual  carpenter,  could  be  fixed  by 
definite  standards  to  avoid  waste  in  time  and  materials.    It  was 


446  BUSINESS  STATISTICS 

found  that  there  were  certain  methods  of  handling  the  lumber 
which  were  cheaper  than  any  other  way.  It  was  shown  by  actual 
figures  the  saving  that  could  be  accomplished  by  furnishing 
laborers  to  do  all  of  the  heavy  work  so  that  the  carpenters  could 
stick  to  their  job  of  carpentry. 

This  has  been  chosen  as  a  typical  case.  It  is  always  found,  even 
in  such  simple  work  as  carpentry,  when  time  studies  are  made  and 
the  work  is  thoroughly  analyzed,  that  processes  are  improved  and 
waste  of  time  and  of  material  is  prevented. 

Such  studies  are  expensive.  Yes,  this  is  true,  so  far  as  the 
obtaining  of  original  data  is  concerned.  Remember  one  thing, 
however;  once  the  data  are  obtained,  the  unit  times  and  the 
standards  are  adapted  not  only  for  that  one  piece  of  work,  not 
only  for  that  one  locality,  but  for  all  processes,  anywhere, 
involving  the  units  observed.  You  will  doubtless  agree  with  me 
that  ordinary  over-all  records  taken  in  any  one  shop  are  abso- 
lutely useless  for  another  shop.  In  time  study  work  it  is  entirely 
different,  and  we  have  instances  of  data  taken  in  Philadelphia  on 
the  manufacture  of  one  type  of  machinery  being  used  in  Boston 
for  the  manufacture  of  an  entirely  different  type  of  machinery. 
While  the  work  was  entirely  different,  the  same  units  were  used 
in  the  processes.  The  collection  of  such  data,  therefore,  in  the 
various  trades  will  eventually  prove  of  universal  value. 

The  most  important  function  of  time  study,  as  has  been 
implied,  is  setting  tasks  or  fixing  piece-rates.  Time  study  is  useful 
also  for  making  more  exact  estimates.  It  is  useful  for  standard- 
izing implements  and  machines.  It  is  useful  for  arranging  a  gang 
of  men.  In  a  recent  civil  service  examination  for  a  $4000  engineer- 
ing position,  one  of  the  questions  asked  involved  the  general 
principle  in  laying  out  a  gang  of  men  and  horses  for  hauling 
earth  from  a  bank  to  a  distance  of  1000  feet.  Out  of  seventeen 
applicants,  less  than  half  appreciated  the  most  elementary  prin- 
ciple that  the  number  of  men  loading  carts  must  be  governed 
by  the  time  required  for  the  carts  to  make  the  trip  to  and  from 
the  dump. 

I  wonder  how  many  men  who  have  given  attention  to  this 
matter  are  thinking  to  themselves,  "  This  is  all  very  well  for  some 


FACTORY  STATISTICS  447 

kinds  of  work.  It  is  all  right  for  simple  work  such  as  form  making, 
but  cannot  be  done  in  the  work  with  which  I  am  connected."  It 
is  almost  amusing,  if  it  were  not  so  serious,  to  hear  some  such 
remark  as  this  repeated  over  and  over  again  by  men  in  all  classes 
of  work  with  which  we  come  in  contact.  The  most  practical 
answer  lies  in  the  fact  that  time  studies  have  been  made  and  task 
work  or  scientific  piecework  or  task  work  has  actually  been 
introduced  in  so  many  classes  of  work  that  it  is  possible  to  state 
without  question  that  it  is  of  universal  application. 

Not  long  ago  I  attended  a  conference  where  the  subject  of  one 
paper  was  the  limitations  of  scientific  management.  The  idea 
was  expressed  by  the  writer  (who  evidently  had  never  come  in 
close  contact  with  the  system)  that  it  was  applicable  to  many 
classes  of  work,  but  it  was  out  of  the  question  to  apply  tasks  to 
the  miscellaneous  operations  in  the  machine  shop.  Unfortunately 
for  the  reader  of  the  paper,  another  speaker  on  the  program 
was  the  president  of  a  large  machine  shop,  manufacturing  not 
merely  standard  tools  but  making  up  miscellaneous  orders.  He 
stated  that  in  his  shop  scientific  methods  of  management  had 
prevented  failure  during  the  hard  times  of  1907,  had  greatly 
increased  output,  and  at  the  same  time  had  reduced  the  number 
of  men. 

Experience  in  scientific  methods  of  management  has  shown 
positively  not  only  that  quality  is  not  reduced,  but  that  it  is 
improved.  As  a  matter  of  fact,  tasks,  if  properly  handled,  pro- 
vide a  means  for  regulating  not  merely  the  quantity  but  also  the 
quality  of  output.  In  many  classes  of  work  the  saving  of  material 
is  of  much  greater  importance  than  the  saving  of  time.  In  such 
cases,  the  worker  is  paid  a  bonus  not  simply  for  time  but  for 
quality.  In  fact,  the  largest  proportion  of  the  bonus  is  based  on 
the  saving  of  material. 

While  time  study  is  one  of  the  fundamental  principles  involved 
in  scientific  management  and  the  other  processes  of  management 
are  centered  to  a  considerable  extent  around  the  operation  of 
tasks,  in  the  sequence  of  the  introduction  of  the  new  management, 
the  setting  of  tasks  is  one  of  the  last  rather  than  the  first  of  the 
operations  to  perform. 


448  BUSINESS  STATISTICS 

If  a  manufacturer  wishes  to  take  steps  to  increase  his  output, 
he  naturally  turns  first  to  the  consideration  of  the  speed  of  the 
operative.  How  can  I  get  more  work  out  of  my  men  ?  How  can 
I  determine  in  a  scientific  manner  the  amount  of  work  they  ought 
to  do  in  a  given  time  ?  How  can  I  set  the  tasks  or  piece-rates  that 
will  be  fair  ?  These  are  ultimate  aims  of  a  perfected  organization, 
but  instead  of  indicating  the  first  thing  to  be  done  they  represent 
nearly  the  last.  If  you  begin  to  set  tasks  without  first  getting 
your  machines  and  your  men  and  your  methods  of  handling  your 
materials  into  shape  you  will  fail  absolutely  in  accomplishing  any- 
thing but  the  most  superficial  results.  It  is  just  here  that  the 
scientific  method  differs  most  from  the  rule  of  thumb  method. 

The  planning  of  work  is  necessary  in  order  that  time  shall  not 
be  wasted  by  the  workers  in  ineffective  effort.  The  routing  must 
be  carried  to  a  high  degree  of  excellence  in  order  to  distribute  the 
materials  properly  and  permit  the  setting  of  individual  tasks. 
The  worker  must  be  trained  to  accomplish  properly  his  task. 

Turning  to  the  matter  of  time  study  when  the  plant  is  ready  for 
it,  the  first  thing  that  must  be  done,  having  obtained  the  necessary 
stop  watch  and  blanks  for  recording  observations,  is  to  analyze 
the  operations.  A  decision  must  be  made  as  to  the  elements  or 
units  into  which  each  operation  must  be  divided.  In  the  case  of 
form  making,  for  example,  the  units  were  placing  cleat,  placing 
board,  driving  nail,  placing  form  on  pile,  together  with  certain 
others  of  less  importance  not  mentioned.  The  sequence  of  opera- 
tions must  be  determined  so  that  the  times  can  be  readily  entered. 
The  time-study  man  must  really  learn  each  trade  he  observes. 
Preferably  he  should  be  chosen  from  the  plant  organization,  since 
it  is  of  much  advantage  for  him  to  be  familiar  with  the  processes. 
On  the  other  hand  a  really  expert  time-study  man,  because  of  his 
power  of  analysis  and  of  seeing  the  operations  that  are  taking 
place,  can  handle  any  kind  of  work  and  in  a  very  short  time  will 
know  more  of  details  than  the  manufacturer  himself,  simply 
because  it  is  his  job  to  watch  each  individual  operation. 

Standardization  of  implements  and  machines  must  proceed 
hand  in  hand  with  the  time  study.  For  example,  even  in  such 
simple  work  as  handling  earth,  the  proper  capacity  of  the  cart  or 


FACTORY  STATISTICS  449 

wheelbarrow  must  be  determined,  the  size  of  shovel  fixed,  and 
so  on.  As  a  matter  of  fact,  this  standardization  even  in  simple 
matters  is  much  more  intricate  than  one  would  think. 

With  regard  to  the  process  to  be  followed  in  observations,  the 
actual  time  study  is  best  made  by  taking  a  record  of  every  opera- 
tion which  a  man  performs,  including  not  merely  the  effective 
work,  but  the  ineffective  work  and  the  lost  time.  The  stop  watch 
is  started,  and  the  time  he  completes  every  operation,  including 
the  ineffective  ones,  is  noted  on  the  note  sheets.  Then,  after- 
wards, the  results  are  studied  and  the  operations  tabulated  and 
analyzed  to  see  how  long  it  takes  to  do  the  individual  elements. 

In  making  time  study,  the  selection  of  the  operative  to  observe 
is  a  very  important  point.  Always  select  the  best  workers  on  the 
job  for  your  principal  observations.  Even  if  the  supply  of  labor 
is  so  small  that  it  is  impossible  to  limit  the  employment,  in  a 
particular  branch,  to  men  or  women  who  are  first-class  operatives, 
relegating  the  others  to  some  of  the  places  which  they  are  better 
fitted  to  fill,  the  best  workers  should  be  selected  because  they  work 
steadier  and  their  operations  are  more  uniform.  Also,  the  best 
workers  are  apt  to  use  the  best  methods  of  doing  the  work  and 
will  adopt  new  suggestions  more  readily.  Observations  taken  on 
the  best  workers  do  not  necessarily  mean  that  these  times  can 
be  used  only  for  this  class.  A  percentage  has  to  be  added  to  the 
net  times  in  any  case.  By  properly  adjusting  this  percentage,  the 
rates  may  be  applied  either  to  average  workers  working  at  a  fair 
speed  or  to  first-class  workers.  It  is  usually  a  good  plan  to  give 
the  operative  you  observe  a  special  incentive,  such  as  an  addition 
of  50  per  cent  to  his  pay  on  the  day  of  the  observation,  as  a 
reward  for  the  trouble  you  are  making  him. 

Having  obtained  the  time  of  each  of  the  units  or  elements  by 
a  large  number  of  observations  on  the  operatives  selected,  we 
are  ready  to  make  combinations  of  these  unit  times,  so  as  to 
obtain  the  total  required  time  for  any  operation  containing  these 
units.  It  is  frequently  convenient  to  make  these  combinations 
by  means  of  a  simple  formula.  For  example,  taking  the  making 
up  of  the  side  of  a  column  form,  which  has  already  been  described, 
if  we  let 


450  BUSINESS  STATISTICS 

c  =  time  placing  cleat 
b  =  time  placing  board 
n  =  time  driving  nail 
p  =  time  lifting  pile 

then  assuming  6  cleats,  2  boards  and  24  nails,  the  formula  would 
be 

6c  -{-  2b  +  24W  +  p. 

If  seven  cleats  are  used,  the  6  in  the  first  term  would  be  changed 
to  7 ;  if  three  boards  are  used,  the  26  would  be  changed  to  36,  and 
so  on.  In  practice  when  task  work  is  really  started,  these  formulas 
are  used  to  make  up  permanent  tables,  showing  the  total  times  for 
all  the  combinations  that  are  apt  to  occur. 

A  percentage  always  must  be  added  to  the  observed  times 
before  using  them  to  set  tasks,  to  provide  for  necessary  lost  time 
and  delay  occurring  throughout  the  day.  In  certain  kinds  of 
work  30  per  cent  is  a  correct  value  for  this.  The  per  cent  to  add  is 
governed  by  the  character  of  the  work  and  whether  machine  or 
hand  labor.  To  fix  the  length  of  the  task,  the  time  thus  obtained 
may  now  be  used  directly.  If  the  operative  accomplishes  the  task 
in  this  time,  he  is  given  his  regular  day  wage  for  the  period  plus 
a  substantial  bonus.  If  he  does  not  complete  it  in  the  given  time, 
he  receives  his  regular  pay  without  the  bonus.  If  the  data  are  to 
be  used  for  setting  scientific  piece-rates  or  premiums,  the  plan  to 
be  followed  is  somewhat  different  but  the  general  principle  is  the 
same. 

In  determining  the  amount  of  bonus,  bear  in  mind  a  funda- 
mental law  of  Mr.  Taylor's,  that  a  man  will  not  do  a  maximum 
day's  work  for  an  ordinary  day's  pay.  In  order  to  work  at  the 
best  speed  consistent  with  physical  well  being,  an  operative  must 
receive  from  25  to  75  per  cent  higher  pay  than  his  ordinary  day 
wages.  To  provide  for  required  quality  of  the  work,  it  is  neces- 
sary, as  I  have  already  said,  to  adjust  the  bonus  so  that  a  man's 
payment  will  depend  not  simply  on  output,  but  also  on  the 
quality  of  the  product  or  the  amount  of  material  used. 

In  starting  any  form  of  piecework  or  task  work,  an  essential  is 
to  begin  with  one  operative.    Get  this  one  well  started  and  making 


FACTORY  STATISTICS  45 1 

his  or  her  bonus,  before  setting  another  to  work.  If  a  number  of 
workers  are  started  at  the  same  time,  one  or  more  of  them  are 
certain  to  fall  down  and  fail  to  accomplish  their  task  in  the  set 
time.  This  immediately  gives  an  opportunity  for  dissatisfaction. 
The  man  or  woman  selected  for  the  start  should  be  one  of  the 
best  in  the  department.  He  or  she  should  be  especially  instructed 
just  how  to  do  the  work,  so  that  there  can  be  no  possible  delay  in 
handling  the  materials,  and  so  that  the  operation  will  be  accom- 
pUshed  with  the  fewest  motions  and  by  the  best  methods. 

In  beginning  tasks  on  a  certain  line  of  work,  it  is  frequently 
advisable  to  give  a  longer  time  than  will  be  adopted  permanently, 
provided,  however,  it  is  clearly  stated  to  the  operatives  that  this 
is  simply  temporary  so  as  to  enable  them  to  become  accustomed 
to  the  new  methods  and  provided  it  is  also  clearly  stated  that  at  a 
certain  fixed  period  the  rates  will  be  changed  to  new  definitely 
stated  figures.  These  permanent  figures  must  be  given  out  before 
tasks  are  begun.  Never  change  this  regular  rate  unless  radical 
changes  in  methods  or  machinery  are  made  by  the  management 
which  reduce  the  amount  of  labor. 

As  illustrations  of  the  operation  of  task  and  bonus  in  practice, 
I  may  refer  to  one  case  of  hand  labor  for  girl  operatives  without 
machinery,  where  the  reduction  in  cost  averaged  about  50  per 
cent  during  the  first  year  after  installation,  while  the  girls  accom- 
plishing their  tasks  earned  40  per  cent  more  than  previously.  In 
another  case  of  two  men  operating  a  machine,  the  reduction  in 
cost  was  about  35  per  cent,  notwithstanding  a  wage  increase  for 
tasks  accomplished  of  40  per  cent. 

In  many  classes  of  machine  work,  the  increase  in  output  is  very 
large  because  of  the  standardization  of  the  machine.  In  certain 
government  work,  for  example,  the  increase  in  output  was  over 
two  and  one-half  times.  In  certain  cases  of  which  we  have  record 
not  merely  was  the  labor  cost  substantially  reduced,  but  the  cost 
of  material  was  reduced  even  as  much  as  one-half,  due  chiefly  to 
the  thorough  planning  and  routing  of  the  materials  for  each  piece 
of  work. 


452  BUSINESS  STATISTICS 

VII.  The  Automatic  Rating  of  Workmen  ^ 

The  United  States  Armory  at  Springfield,  Mass.,  has  developed 
to  a  very  high  degree  of  usefulness  the  governmental  system  of 
rating  workmen  so  that  all  increases  in  wages,  all  dismissals  from 
employment,  the  individual  standing  of  employees  in  relation  to  a 
standard  and  to  one  another  are  determined  automatically.  The 
personal  equation  is  eliminated  from  the  management;  neither 
favoritism  nor  unfavorable  prejudice  can  make  itself  felt,  to  help 
or  to  injure  a  workman.  Up  to  a  certain  point  the  men  are 
competitors  among  themselves. 

The  system  constitutes  an  important  element  in  the  general 
efiiciency  work  of  the  Armory.  It  insures  a  concentration  of  labor 
of  a  degree  well  beyond  that  found  in  most  private  manufacturing 
establishments.  The  visitor  is  impressed  with  the  industrial 
discipline;  the  complete  absence  of  idleness,  of  conversation 
between  the  men;  the  indifference  to  incidents  foreign  to  the 
routine  of  the  shop. 

The  natural  first  thought  is  that  a  government  factory  quite 
naturally  assumes  an  atmosphere  of  strict  discipline  because  its 
managers  are  regular  army  officers,  who  are  accustomed  to  abso- 
lute obedience  to  their  wishes  on  the  part  of  their  subordinates, 
under  which  conditions  the  advantage  over  the  works  of  a  private 
manufacturer  would  seem  to  be  large.  An  analysis  of  conditions 
proves  that  this  is  not  the  case.  On  the  contrary  the  government 
shop  is  handicapped  in  various  ways,  especially  in  the  matter  of 
civil  service.  This  excellent  institution  possesses  features  which 
operate  against  discipline.  It  serves  to  tie  the  hands  of  the 
management.  Little  option  is  given  as  to  who  shall  be  hired,  and 
summary  dismissal  is  often  impossible,  even  where  it  may  be 
wholly  desirable.  The  handHng  of  workmen  must  conform  to  the 
laws  as  enacted  by  Congress.  The  employees  are  not  enlisted 
men.  Their  relations,  man  to  man,  with  those  in  authority  are 
much  the  same  as  in  a  private  plant.  A  large  measure  of  the 
success  that  has  been  attained  at  Springfield  is,  of  course,  directly 

^  Iron  Age,  April  3,  1913,  pp.  811-812.  Reprinted  by  permission  of  Iron  Age. 
Illustrations  of  forms  are  omitted. 


FACTORY  STATISTICS  453 

attributable  to  the  personality  and  the  ability  of  the  managing 
officers,  but  the  statement  would  be  equally  true  in  a  discussion  of 
any  system  designed  to  give  the  greatest  possible  production  in 
an  industrial  plant. 

The  automatic  rating  of  workmen  is  but  one  element  of  the 
shop  efficiency  system,  but  it  is  a  very  important  one.  Individual 
production  being  high,  costs  are  correspondingly  low.  Under  the 
present  management,  the  cost  of  a  standard  army  rifle  has  been 
reduced  from  $15  to  $13.67,  which  is  a  record  as  compared  with 
results  obtained  in  the  works  of  the  private  factories  of  this  and 
other  countries,  and  in  government  shops  generally.  Yet  the  men 
work  only  eight  hours  a  day  and  are  given  twenty-seven  full  days 
a  year  with  pay,  which  expense  for  labor  the  rifle  has  to  bear.  And 
it  should  be  added  that  the  United  States  army  rifle  is  conceded 
to  be  the  finest  military  arm  of  its  class  in  use  today. 

The  efficiency  report  is  not  new  in  itself.  It  has  been  used  in 
government  plants  for  several  years.  But  its  application  and  the 
methods  employed  in  getting  at  the  described  results  have  been 
developed  at  Springfield  with  specialized  attention  until  they 
yield  accurate,  unprejudiced  information  of  inestimable  value. 

The  efficiency  of  a  workman  is  the  combination  of  five  elements. 
They  are  not  of  equal  importance;  each  has  what  is  known  as 
its  "  relative  weight."  Attendance  and  application  each  have  a 
unit  of  one,  habits  and  adaptability  a  unit  of  two,  and  ability  a 
unit  of  four.  The  total  is  efficiency  on  a  scale  of  one  hundred. 
The  card  has  columns  for  the  analysis  of  ability  and  attendance. 

To  consider  the  latter  factor,  the  subdivisions  are :  absence  with 
leave,  on  account  of  sickness,  without  leave  and  without  pay.  In 
the  illustrated  card  J.  Smith  was  in  the  six  months  absent  fourteen 
days  with  leave,  twenty  days  on  account  of  sickness,  two  days 
without  leave  and  three  days  without  pay,  a  total  of  thirty-nine. 
The  law  gives  him  fifteen  days  with  pay  in  a  year  in  addition  to 
holidays,  all  of  which  count  without  demerit.  Therefore,  as 
J.  Smith  had  had  no  previous  absences  with  pay  in  his  leave  year, 
the  balance  against  him  is  twenty-four.  The  rule  is  that  for  each 
three  days  of  absence  beyond  the  fifteen,  one  demerit  mark  shall 
be  registered,  and,  in  addition,  there  is  a  penalty  of  three  demerits 


454  BUSINESS  STATISTICS 

for  each  day  without  leave.  Therefore  the  workman  had  seven 
marks  plus  six,  and  the  thirteen  subtracted  from  the  one  hundred 
of  the  attendance  column  leaves  him  a  balance  of  eighty-seven. 

Application  and  habits  are  elastic  factors.  In  practice  a  man  is 
given  full  credit,  one  hundred  for  application  and  two  hundred  for 
habits,  unless  real  reason  to  the  contrary  is  known.  As  to  adapta- 
bility and  abihty,  the  records  of  the  employee's  labor,  especially 
if  he  is  on  piecework,  serve  to  check  any  opinion  favorable  or 
otherwise  which  may  have  been  formed  by  his  superiors.  In  the 
case  in  question  the  man  is  given  a  full  one  hundred  for  applica- 
tion, two  hundred  for  habits  and  one  hundred  and  eighty  for 
adaptabihty.  Ability  is  analyzed  by  the  character  of  the  work  as 
specified  at  the  bottom  of  the  card  and  by  the  quality  and  quan- 
tity produced.  J.  Smith  is  given  three  hundred  and  eighty,  the 
unit  being  four,  making  his  grand  total  of  efficiency  nine  hundred 
and  forty-seven,  or  94.7  per  cent.  This  is  his  rating.  By  it  we 
must  abide. 

The  ratings  are  determined  semi-annually.  No  one  man  makes 
the  decision  as  to  the  various  elements  of  the  efficiency  card.  The 
matter  is  in  the  hands  of  a  board  consisting  of  the  officer  in  charge 
of  the  shops,  the  assistant  officer  in  charge,  the  general  foreman  in 
charge  of  the  shop  where  the  man  is  employed  (there  are  two 
plants  at  Springfield  known  as  the  Hill  Shop  and  the  Water  Shop), 
the  assistant  foreman  in  charge  of  the  particular  department  in 
which  the  workman  is  employed  and  the  chief  inspector.  Each 
of  these  judges  has  a  more  or  less  intimate  acquaintance  with  the 
men  and  their  individualities.  The  production  records  furnish 
important  knowledge  to  the  board.  It  is  easily  seen  that  injustice 
is  practically  an  impossibility. 

The  efficiency  card  extends  to  the  assistant  foremen.  Each 
must  secure  results.  He  has  no  clerical  duties  to  perform,  but 
concentrates  on  the  instruction  of  his  men,  on  the  maintaining  of 
discipKne,  which  means  keeping  his  men  working  continuously, 
and  on  watching  production  in  order  that  there  may  be  no  loss 
through  work  which  cannot  pass  inspection.  The  attitude  of  the 
management  toward  these  foremen  is  unusual.  Many  a  shop 
superintendent  would  find  it  worth  while  to  take  a  hint  from  this 


FACTORY  STATISTICS  455 

element  of  the  system.  As  has  been  stated,  the  foremen  are  rated 
like  the  men.  The  deciding  board  consists  of  the  officers  in  charge 
of  the  shop,  the  assistant  officer  in  charge,  the  general  foreman  and 
the  chief  inspector.  His  pay  is  determined  by  his  percentage  of 
efficiency.  If  in  reducing  working  forces  a  foreman  is  to  be 
dropped,  the  low  man  in  the  list  goes,  the  theory  being  that  each 
is  sufficiently  versatile  in  his  ability  so  that  he  can,  if  the  need 
arises,  be  transferred  from  one  department  to  another  without 
interfering  with  the  routine  of  production. 

To  be  efficient  he  must  make  his  department  produce  the  pre- 
determined quantity  of  accurate  work.  Few  plants  anywhere 
demand  such  fine  limits  of  accuracy  as  those  in  practical  every- 
day use  at  Springfield  in  the  manufacture  of  army  rifles,  machine 
guns,  bayonets,  sabres,  scabbards  and  other  equipment  of  war. 
To  prove  the  statement,  every  part  of  every  army  rifle  must  be 
interchangeable  in  any  other  rifle  of  the  model,  whether  it  was 
made  last  week  or  five  years  ago.  Practically  all  of  the  men  are 
on  piecework;  the  inspection  department  is  maintained  on  a 
most  rigid  basis,  as  is  demonstrated  by  the  fact  that  one  man  in 
every  eight  is  an  inspector.  Therefore,  unless  the  work  of  each 
workman  is  gauged  by  the  foreman  at  frequent  intervals  each 
day,  he  may  become  careless,  and  in  consequence  entail  a  loss  to 
the  Armory  and  to  himself.  Each  man  is  presimied  to  pay  for 
work  which  he  spoils,  but  this  cannot  save  the  government  from 
loss,  for  the  law  reads  that  the  financial  penalty  shall  not  exceed 
the  workman's  daily  pay.  In  a  few  hours  he  could  ruin  the  value 
of  many  days'  wages. 

The  importance  of  attention  to  work  is  made  much  of  by  the 
Armory.  If  workmen  are  observed  to  be  talking  too  frequently,  or 
otherwise  unnecessarily  idle  or  inattentive,  they  are  given  a 
demerit  mark,  which  enters  into  their  efficiency  record.  More- 
over, the  foreman  is  held  fully  responsible  for  such  occurrences, 
and  their  repetition  is  considered  prima  facie  evidence  that  his 
working  force  is  unnecessarily  large;  that  if  the  required  output  is 
achieved  where  idleness  exists  the  transfer  of  a  man  or  two  to 
some  other  department  can  do  no  harm,  providing  that  the  stand- 
ard of  industry  is  maintained.    So  the  curtailment  is  made  and 


4S6  BUSINESS  STATISTICS 

the  foreman  is  compelled  to  accomplish  results  with  fewer  men. 
It  may  be  stated,  however,  that  the  knowledge  on  the  part  of  the 
foremen  and  workmen  that  these  penalties  may  be  expected 
makes  the  necessity  of  their  enforcement  a  very  rare  occurrence. 

On  July  I  and  January  i  of  each  year  the  list  of  men  is  made  up 
by  class  and  grade  and  percentage  of  efficiency.  The  system  is 
inexorable.  To  be  sure,  an  occasional  exception  may  be  made  in 
the  operation  of  the  system.  Annotations  occasionally  appear 
against  the  names  of  individuals  on  the  list  in  the  records  of 
the  management.  For  example,  a  highly  skilled  and  faithful 
man  may  have  dropped  to  the  bottom  of  his  class  because  of  a 
serious  unavoidable  illness,  such  as  pneumonia  or  t3^hoid.  The 
long  absence  from  labor  was  a  serious  matter.  Knowledge  of  the 
man^s  previous  record  may  show  that  apart  from  this  enforced 
idleness  his  record  has  been  exceedingly  good.  The  management, 
therefore,  may  decide  not  to  drop  him  in  case  a  dismissal  is  to  be 
made.  But  outside  of  such  special  cases  the  system  makes  no 
distinction.  Illness  is  considered  as  a  misfortune  to  the  victim; 
a  well  man  is  a  more  valuable  unit  in  the  shop  force  than  an 
invalid  and  in  justice  to  the  former  he  is  ranked  above  the  man 
whose  health  compels  frequent  absences. 

As  to  the  wage  rate,  the  efficiency  list  removes  all  causes  of 
controversy.  The  workman  enters  the  shops  on  his  own  basis  of 
pay.  If  it  is  found  that  he  is  worth  more  money,  the  increase 
comes  to  him  without  his  solicitation,  or  it  may  happen  that  his 
earning  power  is  below  that  which  he  has  claimed,  and  his  pay 
may  decrease  as  he  drops  to  a  lower  class.  Should  a  man  ask  for 
more  wages  he  is  told  that  changes  are  made  semi-annually  only. 
His  card  is  referred  to  and  he  is  informed  frankly  regarding  the 
possibility  which  awaits  him.  His  efi&ciency  may  be  increasing,  or 
it  may  be  decreasing,  or  standing  still.  He  cannot  claim  that  he 
has  been  unfairly  treated,  for  his  record  is  as  unprejudiced  as  if 
kept  by  an  automaton. 

He  is  working  in  competition  with  the  men  who  are  doing  the 
same  class  of  work.  He  makes  his  own  record.  If  he  is  diligent, 
skillful,  dependable,  his  standing  is  correspondingly  high.  On  the 
other  hand,  if  he  is  a  chronic  absentee,  if  his  habits  are  not  good, 


FACTORY  STATISTICS 


457 


or  if  he  is  slothful,  his  percentage  of  efficiency  must  be  low.  He 
may  lose  his  position  because  he  is  at  the  foot  of  the  list  and  is  the 
first  to  be  discharged,  or  his  rating  may  fall  so  low  as  to  place  him 
in  a  lower  class  as  to  wages. 

The  percentage  of  idle  hours  of  workmen  has  gone  down 
tremendously  under  the  Springfield  adaptation  of  the  rating 
system.  The  periodic  ^'  sickness  "  following  pay  day  is  rare.  Few 
men  care  to  take  unnecessary  demerit  marks.  The  wholesale 
desertion  for  an  afternoon  or  a  day  which  occasionally  demor- 
alizes a  plant,  because  of  a  ball  game  or  other  outside  event  of 
exceptional  interest,  is  practically  unknown. 

The  rating  system  has  an  important  place  in  securing  flexibility 
of  production;  in  other  words,  the  capability  of  the  works  to 
carry  an  overload.  At  the  present  time  the  output  of  army  rifles 
is  one  hundred  and  fifty  per  day.  Recently  it  was  found  desirable 
to  increase  production  temporarily  to  two  hundred,  and  the  task 
was  accomplished  without  adding  to  the  working  force  or  to  the 
number  of  working  hours.  Each  man  willingly  labored  at  in- 
creased pressure  for  the  time  being,  without  creating  confusion, 
and  of  course,  without  decreasing  the  quality  of  the  product. 
This  is  an  essentially  important  factor  in  a  plant  which  may  be 
called  upon  at  any  time  to  speed  up  its  production.  The  Spring- 
field Armory  shops  are  equipped  to  manufacture  five  hundred 
rifles  per  day  of  eight  hours.  The  machinery  is  always  in  complete 
readiness  to  be  started  up  and  full  stocks  of  material  are  main- 
tained for  that  purpose.  In  case  of  emergency  everything  would 
be  in  readiness  to  start  manufacturing  on  a  large  scale,  the  exist- 
ing force  going  on  a  basis  of  extreme  production,  keeping  the  out- 
put ahead  of  normal  until  the  full  complement  of  men  were 
recruited.  The  discipline  of  the  system  would  be  invaluable  in 
such  an  emergency. 

The  effect  of  this  efficiency  system  is  shown  in  the  close  and 
intimate  relations  between  the  management  and  the  workmen  — 
and  on  account  of  this  relationship,  labor  troubles  are  unknown. 


458  BUSINESS  STATISTICS 

VIII.  Hiring  and  Firing  ^ 
By  Magnus  W.  Alexander 

It  must  be  obvious  beyond  argument  that  every  unnecessary 
dismissal  of  an  employee  must  mean  a  definite  economic  waste 
to  the  employer,  to  the  employee,  and  to  society.  It  seems  obvi- 
ous also  that  the  magnitude  of  this  waste  and  its  influence  on  the 
industrial  situation  is  by  no  means  clearly  understood,  otherwise 
this  important  phase  of  the  management  of  men  would  have 
received  adequate  attention  before  now.  Many  managers  of 
large  businesses,  to  be  sure,  have  recognized  the  existence  of  this 
problem  and  have  established  specialized  employment  depart- 
ments to  deal  with  it.  They  know  from  experience  that  it  does 
not  pay  to  hire  and  fire  employees  haphazardly;  they  realize 
that  it  costs  money  to  train  a  new  employee,  even  a  skilled  work- 
man, in  the  special  practices  that  are  peculiar  to  a  given  concern, 
and  that  upon  his  dismissal,  save  on  the  ground  of  no  further 
need,  a  similar  expenditure  must  be  incurred  for  the  training  of 
another  new  employee,  which  expenditure  only  good  reason  for 
the  dismissal  of  the  previous  employee  can  justify.  In  only  a  few 
instances,  however,  have  employment  departments  been  placed 
in  charge  of  men  of  experience  and  capacity  who  are  competent  to 
deal  adequately  with  the  many  and  often  perplexing  phases  of 
the  employment  situation;  while  still  more  infrequently  have 
these  employment  managers  been  entrusted  with  the  equally, 
if  not  even  more  important  duty  of  continuing  their  personal 
interest  in  the  men  and  women  while  they  are  retained  in  the 
employment,  in  order  that  they  may  be  assured  of  proper  training 
and  fair  treatment  and  may  not  be  discharged  without  good 
cause.  Without  this  latter  function,  which  he  must  share  with 
the  superintendent  or  supervising  foreman  in  harmonious 
cooperation,  no  employment  manager  will  be  able  to  bring  about 
a  satisfactory  solution  of  the  hiring  and  firing  problem. 

In  order  to  place  this  subject  concretely  before  employers  so 
that  they  may  recognize  more  fully  the  importance  of  this  phase 

^  Magnus  W.  Alexander,  Hiring  and  Firing,  pp.  1-16.  An  address  delivered 
at  the  20th  Annual  Convention  of  the  National  Association  of  Manufacturers  of 
the  United  States.    Reprinted  by  permission  of  the  author. 


FACTORY  STATISTICS  459 

of  economical  management,  I  have  collected  and  analyzed  vari- 
ous employment  statistics  and  studied  various  employment  con- 
ditions in  an  endeavor  to  draw  the  pertinent  lesson  and  to  find 
the  obvious  remedy.  My  observations  were  concerned  especially 
with  large,  medium-size  and  small  metal  manufacturing  concerns 
throughout  the  United  States.  A  similar  investigation  in  fac- 
tories in  Austria,  England,  France  and  Germany  during  the 
summer  of  1913  has  proved,  however,  that  the  problem  under 
discussion  is  of  international  scope. 

The  investigation  endeavored  first  to  trace  the  curve  of  engage- 
ments and  discharges  in  the  various  concerns  during  the  period 
of  one  year  and  then  to  find  out  and  study  the  reasons  for  the 
discharges  of  employees.  All  data  were  obtained  for  the  year 
191 2,  which  may  be  considered  to  have  been  an  industrially 
normal  year.  The  investigation  covered  the  employment  and 
discharge  of  all  classes  of  employees  at  the  various  factories  except 
those  belonging  to  the  commercial  and  engineering  organizations 
and  to  the  general  executive  staff.  A  record  of  those  who  had 
entered  the  service  of  the  concerns  for  the  first  time  and  of  those 
who  had  been  working  in  the  same  place  at  a  previous  period  was 
also  obtained,  for  it  was  assumed  that  re-employment  would 
usually  cause  a  smaller  expense  than  the  employment  of  entirely 
new  people  unfamiliar  with  the  conditions  prevailing  at  a  given 
factory. 

The  figures  herewith  presented  cover  the  aggregate  statistics 
of  twelve  factories  located  in  six  different  states,  some  employ- 
ing only  male  and  others  employing  female  as  well  as  male  opera- 
tives. The  great  variety  of  mechanical  manufacture  in  this  group 
of  factories  ranges  from  the  production  of  big  steam  engines, 
many  forms  qf  electrical  apparatus  and  high-class  automobiles  to 
that  of  fine  tools  and  instruments,  requiring  labor  of  the  highest 
skill  as  well  as  that  of  the  common  kind.  The  smallest  of  these 
factories  carries  normally  less  than  300,  the  largest  more  than 
10,000  employees  on  its  payroll.  While  it  would  add  interest  and 
value  to  this  discussion  to  analyze  separately  the  statistics  of  the 
various  concerns  in  question,  it  would  be  obviously  wrong  to 
divulge  individual  figures  which  were  obtained  confidentially.    It 


460  BUSINESS  STATISTICS 

should  be  said,  however,  that  these  factories  can  be  classed  as 
average  or  even  a  little  above  the  average  in  economical  conduct 
and  in  respect  to  such  influencing  factors  as  availability  of  labor, 
rate  of  wages  and  controlling  legislative  conditions. 

A  word  of  explanation  is  also  in  order  relative  to  the  mathe- 
matics of  the  arguments  herein  presented.  The  rate  of  en- 
gagements and  of  separation  from  service  should  be  considered 
separately  for  each  week,  and  even  for  each  day,  in  order  to  arrive 
at  mathematically  correct  conclusions,  since  changes  in  the  labor 
force  during  a  year  follow  neither  a  straight  line  nor  any  well 
defined  curve,  but  vary  usually  according  to  a  most  grotesque 
zigzag  line.  On  the  other  hand,  inasmuch  as  various  factors  in 
the  calculation  are  in  themselves  of  an  assumptive  character  and 
necessarily  introduce  into  the  problem  an  element  of  uncertainty, 
the  short  cut  methods  of  calculation  herein  used  will  be  found 
to  give  results  sufficiently  accurate  for  the  purpose.  It  has  been 
the  aim  to  give  conservative  values  to  all  assumptions,  and  these 
are  briefly  explained  so  that  anyone  with  different  judgment  may 
readily  substitute  his  assumptions  and  carry  the  calculation 
through  on  that  basis.  Most  industrial  managers,  however,  I 
feel  confident,  will  subscribe  to  the  premises  herein  stated. 

In  the  twelve  factories  above  alluded  to,  statistics  show 
seventy-two  and  eight-tenths  per  cent  of  the  employees  engaged 
during  the  year  had  not  been  employed  in  these  factories  before, 
while  twenty-seven  and  two-tenths  per  cent  had  worked  in  the 
same  factories  during  one  or  several  previous  periods.  As  a  gen- 
eral proposition  these  percentages  will  be  found  to  apply  fairly 
well  to  any  normal  employment  in  the  mechanical  industries. 

This  group  of  factories  gave  employment  to  37,274  employees 
at  the  beginning  and  43,971  at  the  end  of  the  year  191 2.  The 
net  increase  in  the  working  force,  as  between  January  i  and 
December  31,  amounted  therefore  to  6,697  employees,  while 
during  the  same  period  42,571  people  had  been  hired  and  accord- 
ingly, 35,874  had  dropped  out  of  the  employment  for  whatsoever 
reason.  In  other  words,  about  six  and  one-third  times  as  many 
people  had  to  be  engaged  during  the  year  as  constituted  the 
permanent  increase  of  the  force  at  the  end  of  that  period. 


FACTORY  STATISTICS  46 1 

Several  reasons  might  be  given  in  explanation  of  this  condi- 
tion. It  might  be  stated  that  the  labor  market  in  a  given  locality 
was  in  part  responsible  for  the  situation;  it  might  be  claimed 
that  in  a  particular  plant  a  temporary  piece  of  work  had  to  be 
done,  such  as  the  building  of  a  structure  or  the  digging  of  a 
foundation,  for  which  labor  in  excess  of  the  normal  quota  was 
temporarily  needed,  to  be  dispensed  with  again  when  the  special 
work  was  finished.  Unusual  conditions  of  employment  might 
have  been  the  result  of  a  highly  fluctuating  productive  situation, 
brought  about  in  turn  by  a  largely  varying  commercial  demand 
on  the  factories  during  the  four  seasons  of  the  year.  Above  all 
else,  sight  must  not  be  lost  of  the  fact  that  a  certain  amount  of 
separation  from  the  service  is  unavoidable  and  must  be  reckoned 
with,  such  as  results  from  death  and  prolonged  sickness  of 
employees  and  from  the  necessary  discharge  of  some  and  the 
voluntary  resignation  of  others  in  the  working  force. 

The  important  fact,  however,  stands  out  that  42,571  people 
had  to  be  engaged  during  the  year  in  order  to  increase  the 
working  force  by  only  6,697. 

Theoretically,  only  as  many  people  ought  to  have  been  hired 
as  were  needed  permanently  to  increase  the  force.  Practically, 
certain  allowances  must  be  made  in  order  to  view  the  problem 
in  its  correct  light.    These  allowances  must  cover: 

(a)  The  replacement  of  employees  who  die; 

(b)  The  replacement  of  employees  on  prolonged  sick  leave  for 
whom  others  must  be  substituted  temporarily; 

(c)  The  replacement  of  employees  who,  although  they  had 
been  selected  for  their  positions  with  good  judgment,  are 
found  to  be  unsuited  to  the  work  or  imfit  on  account  of 
personal  characteristics,  or  who  leave  of  their  own  accord 
because  they  do  not  find  the  work  congenial,  the  climatic 
conditions  acceptable,  or  who  for  other  reasons  remove 
from  the  locality; 

(d)  The  engagement  of  extra  employees  required  for  short 
periods,  either  on  account  of  a  temporary  piece  of  con- 
struction work  or  usually  on  account  of  the  high  peaks  of 
a  fluctuating  production;  and 


462  BUSINESS  STATISTICS 

(e)  The  recognized  fact  that  no  employment  department  can 

be  run  on  a  100  per  cent  efficiency  basis. 
The  substitution  of  fair  numerical  values  for  these  items  will 
indicate  the  probable  number  of  necessary  engagements  that  will 
have  to  be  made  in  any  event,  even  though  the  numerical  strength 
of  an  employment  is  merely  maintained  and  the  now  prevailing 
weaknesses  in  the  employment  situation  are  removed. 
It  may  be  assumed  that  among  all  employees  annually: 
One  per  cent  die; 

Four  per  cent  are  sick  so  long  as  to  necessitate  their  replace- 
ment temporarily  or  permanently; 
Eight  per  cent  withdraw  from  service  for  unforeseen  or 
unavoidable  reasons,  or  are  discharged  for  justifiable 
causes; 
Eight  per  cent  are  temporarily  needed  on  account  of  normal 

fluctuation  of  production;  and 
Eighty  per  cent  constitutes  a  readily  attainable  efficiency 
of  an  employment  department. 
These  figures  find  their  support  in  the  following  considerations: 
Mortality  tables  give  the  death  rate  of  men  and  women  in 
general  employment  in  accordance  with  the  age  of  such  persons. 
The  average  age  of  employees  in  the  factories  under  considera- 
tion was  therefore  ascertained  and  found  to  be  thirty-one  and  one- 
half  years  for  male  and  twenty-three  years  for  female  employees. 
For  these  ages  mortality  tables  place  the  death  rate  of  male 
employees  at  eight  and  five-tenths  and  of  female  employees  at 
seven  and  ninety-five  hundredths  in  each  thousand.     On  the 
other  hand,  the  experience  of  several  mutual  benefit  associations 
in  factories,  some  extending  over  a  period  of  ten  years,  revealed 
that  about  seven  in  every  thousand  members  had  died  annu- 
ally.   These  statistics,  therefore,  justify  the  assumption  that 
death  removes  annually  not  more  than  one  per  cent  of  factory 
employees. 

The  average  number  of  persons  in  every  thousand  who  are 
annually  incapacitated  by  sickness  or  accident  from  work  for 
definite  periods  cannot  readily  be  learned  from  statistics,  unless 
recourse  is  taken  to  experiences  in  the  German  Empire,  and  then 


FACTORY  STATISTICS  463 

other  factors  of  the  situation  will  also  have  to  be  taken  into 
account.  Meager  statistics  of  mutual  benefit  associations  in 
factories  and  in  particular  the  judgment  of  industrial  managers 
and  assistants  must  therefore  serve  as  a  basis  for  any  assumption 
of  this  character.  In  this  connection  it  must  also  be  recognized 
that  it  is  the  prevailing  custom  in  most  factories  to  carry  on  sick 
leave  for  periods  of  many  weeks  and  often  several  months  those 
of  whose  sickness  the  management  has  definite  knowledge,  and 
not  to  replace  sick  employees,  even  temporarily,  unless  their 
absence  from  work  should  extend  over  a  sufiiciently  long  time  to 
interfere  seriously  with  the  proper  conduct  of  work.  For  the 
above  reasons,  then,  the  assumption  that  annually  4  per  cent  of 
the  working  force  will  have  to  be  hired  temporarily  or  per- 
manently, to  take  the  places  of  sick  employees,  should  liberally 
reflect  actual  conditions. 

As  to  the  number  of  people  who  are  annually  separated  from 
the  service  for  reasons  other  than  death  or  prolonged  sickness, 
no  reliable  figures  seem  to  be  available.  In  fact,  the  only  con- 
crete information  bearing  on  this  subject  seems  to  be  that  given 
by  the  United  States  Civil  Service  Commission,  according  to 
which  8  per  cent  of  all  Government  employees  are  separated 
from  the  service  annually  for  any  reason,  including  that  of  death 
and  sickness.  While  in  the  case  of  Government  employees 
replacement  on  accoimt  of  death  could  again  be  assumed  as  i 
per  cent  that  due  to  prolonged  sickness  should  be  placed  lower 
than  4  per  cent  and  might  usually  not  be  more  than  3  per  cent, 
on  account  of  the  liberality  of  treatment  of  Government  em- 
ployees and  the  lack  of  competitive  commercial  conditions  in  the 
Government  service.  From  this  it  would  follow  that  the  annual 
separation  from  service  among  Government  employees  for  other 
reasons  than  those  of  death  and  sickness  might  be  about  4  per 
cent.  Realizing,  however,  that  Gk)vemment  employment  con- 
ditions are  usually  more  favorable  to  stability  of  service  than 
those  prevailing  in  commercial  industrial  establishments,  due 
allowance  has  been  made  for  this  difference  by  doubling  the 
Government  estimate  and,  therefore,  allowing  8  per  cent  for 
withdrawal  by  voluntary  or  involuntary  resignation  alone. 


464  BUSINESS  STATISTICS 

The  effect  of  a  normally  fluctuating  production  upon  the 
numerical  strength  of  the  working  body  is  difficult  to  estimate. 
Opinions  differ  widely  as  to  how  far  production  can  be  fairly 
evenly  distributed  over  the  whole  year,  but  the  conviction  is 
making  itself  felt  among  employers  that  in  most  businesses  the 
prevalent  erratic  curve  of  productive  requirements  can  be  turned 
into  a  more  even  wave  line.  Several  interesting  evidences  are 
already  available  to  show  the  effect  of  well-directed  effort  in  this 
field.  It  must,  nevertheless,  be  admitted  that  certain  fluctuations 
of  production  are  unavoidable;  to  a  certain  extent  the  seasonal 
character  of  a  business,  and  more  pertinently,  commercial  pros- 
perity or  depression,  are  determining  and  uncontrollable  factors. 
A  correct  assumption  is  made  so  much  the  more  difficult  also 
because  normal  productive  fluctuations  will  but  little  affect  certain 
classes  of  employees,  such  as  highly  skilled  mechanics  and  clerks, 
while  the  great  body  of  operatives  or  pieceworkers  will  almost 
instantaneously  feel  the  effect  of  these  fluctuations.  The  opinion 
of  many  who  were  consulted  seems  to  center  around  the  assump- 
tion that  for  all  employees  and  for  a  normally  fluctuating  produc- 
tion an  annual  temporary  engagement  of  8  per  cent  of  the  total 
number  of  employees  would  be  justified. 

Finally,  in  regard  to  the  efficient  conduct  of  an  employment 
department,  it  should  not  be  difficult  to  attain  an  efficiency  of  at 
least  80  per  cent  in  this  highly  specialized  branch  of  service  with 
but  a  very  limited  staff. 

Applying  the  factors  above  outlined  to  the  problem  in  hand,  it 
follows  that  while  theoretically  only  6,697  employees  should  have 
been  employed  to  allow  for  an  increase  of  the  working  force  by 
that  number,  the  additional  engagement  of  13,843  persons  or  a 
total  engagement  of  20,540  ^  persons  would  be  justified  to  cover 
withdrawals  by  death,  sickness  or  resignation  to  allow  for  pro- 

*  Replacement  of  initial  force  =  21  %  of  37,274  on  80%  basis  of  hiring 

efficiency =  9,785 

Replacement  of  replacement  =  ^  of  (21%  of  9,785  on  80%  basis) =  i>285 

Permanent  increase  of  force =  6,697 

Additional  increase  for  permanent  increase  on  80%  basis =1,674 

Replacement  of  total  increase  =  )^  of  (21  %  of  6,697  +1,674  on  80%  basis)  =  1,099 


Total. 


20,540 


FACTORY  STATISTICS  465 

ductive  fluctuations  and  for  practical  employment  results  and  to 
cover  the  permanent  increase  in  the  force. 

Yet  the  fact  is  that  42,571  employees  were  engaged  where  the 
engagement  of  only  20,540  ^  persons  could  readily  be  defended; 
22,031  persons  were,  therefore,  engaged  above  the  apparently 
necessary  requirements. 

It  is  obvious  that  a  considerable  sum  of  money  must  have  been 
wasted  in  unnecessarily  engaging  so  large  a  force  of  men  and 
women.  The  picture  herewith  presented  will  become  at  once 
more  lucid  and  more  appealing  if  the  figures  are  given  monetary 
values. 

No  reliable  investigation  seems  to  have  been  made  and  pub- 
lished in  respect  to  such  financial  valuation.  Industrial  managers 
were,  therefore,  interviewed  in  an  effort  to  obtain  from  them  a 
consensus  of  opinion,  but  they  were  found  to  be  rather  loath 
to  express  their  views  because  they  had  not  given  heretofore 
serious  thought  to  the  question.  While  one  manager  estimated 
the  cost  of  hiring  and  breaking  in  an  employee  at  $30,  the 
estimates  of  all  others  ranged  from  $50  to  $200  per  employee. 
The  great  difference  in  these  estimates  is  no  doubt  due  to 
the  diversity  of  the  industries  represented  by  these  managers. 
Most  estimates  ranged  between  $50  and  $100.  One  machine 
tool  builder,  usually  keen  in  following  up  matters  of  this  kind 
when  they  have  been  called  to  his  attention,  looked  into  the 
subject  with  some  care  and  stated  it  as  his  belief  that  the 
engagement  of  almost  1,000  persons  in  his  plant  during  one  year, 
while  the  permanent  increase  in  his  force  amounted  to  less  than 
50,  reduced  his  profits  by  fully  $150,000.  His  estimate,  there- 
fore, is  about  $150  per  employee.  The  head  of  a  large  auto- 
mobile manufacturing  concern  stated  with  equal  positiveness 
that  the  engagement  of  a  new  employee  would  involve  the  expend- 
iture of  at  least  $100.  This  statement  is  so  much  the  more 
surprising  as  it  is  well  known  that  on  account  of  the  high  wages 
paid  in  the  automobile  industry  it  should  not  be  difficult  to  secure 
the  best  type  of  employees,  both  as  to  technical  skill  and  general 
discipline,  and  to  hold  them  fairly  well.  Still  another  manager 
^  See  footnote,  p.  464. 


466  BUSINESS  STATISTICS 

who  employs  a  great  deal  of  female  labor  estimated  this  cost  in 
some  departments  to  run  as  high  as  $200  per  employee,  largely 
on  account  of  the  costliness  of  the  material  which  these  employees 
handle. 

Unquestionably  the  skill,  experience  and  intelligence  of  a  new 
employee  have  much  bearing  upon  the  amount  of  money  that 
needs  to  be  expended  for  his  training.  Another  important  con- 
sideration is  whether  the  new  employee  is  working  on  expensive 
or  low-priced  machinery  or  with  high  or  low-priced  tools,  or  on 
expensive  or  cheap  materials;  and  to  a  certain  extent  whether  or 
not  he  has  been  employed  before  in  the  same  shop  and  particularly 
on  the  same  class  of  work. 

With  this  thought  in  mind  I  subdivided  the  employees  under 
investigation  into  five  groups  and  studied  the  requirements  of 
each  group  as  to  the  quantity  and  quahty  of  required  instruction 
for  new  employees  and  the  e£fect  of  the  work  of  new  employees 
upon  the  economical  conduct  of  the  business. 

Group  A  comprises  highly  skilled  mechanics  who  must  have 
practiced  their  trade  for  a  number  of  years  in  order  to  attain  the 
required  degree  of  all-around  experience  and  proficiency; 

Group  B  comprises  mechanics  of  lesser  skill  and  experience 
who  can  acquire  an  average  degree  of  proficiency  within  a  year 
or  two; 

Group  C  contains  the  large  number  of  operatives  usually  known 
as  pieceworkers,  who  without  any  previous  skill  or  experience  in 
the  particular  work  can  attain  fair  efficiency  within  a  few  months, 
somewhat  depending  on  the  character  of  the  work; 

Group  D  includes  all  unskilled  productive  and  expense  laborers 
who  can  readily  be  replaced  in  the  course  of  a  few  days;  and 

Group  E  is  composed  of  the  clerical  force  in  the  shops  and 
offices. 

The  distribution  of  the  employees  in  these  five  groups  was  found 
to  be  as  given  in  the  table  below,  assuming  that  73  per  cent  in 
each  group  were  newly  hired  and  27  per  cent  were  re-hired 
employees. 

The  next  task  is  to  find  how  many  employees  in  each  group 
were  apparently  unnecessarily  hired.     Approximately  correct 


FACTORY  STATISTICS  467 


Number  of  Employees 

Total  Engagements 

Group 

Initial 

Increase 

AU 

New 

Re-Hired 

A 

3,355 

626 

4,661 

3,393 

1,268 

B 

4,473 

814 

6,296 

4,583 

i»7i3 

C 

12,673 

2,327 

14,440 

10,512 

3,928 

D 

13,046 

2,369 

14,321 

10,426 

3,89s 

E 

3,727 

561 

2,8S3 

2,077 

776 

All     37,274     6,697      42,571      30,991      11,580 

results  will  be  obtained  by  employing  for  each  group  the  same 
method  of  calculation  as  was  used  for  finding  the  number  of 
unnecessarily  engaged  persons  in  the  total  number  of  employees. 
In  order  to  secure  more  correct  figures,  allowance  would  have  to 
be  made  for  the  fact  that  while  the  same  mortality  and  sickness 
rate  and  the  same  emplo3Tnent  efiiciency  may  be  considered  to 
hold  in  all  groups,  the  rates  of  withdrawals  by  resignation  and 
discharge  and  the  effect  of  a  normally  fluctuating  production  will 
vary  for  each  group.  On  the  one  hand,  skilled  employees  are 
more  steady  and  will  give  less  cause  for  discharge  than  ordinary 
pieceworkers  or  expense  laborers;  on  the  other  hand,  all-around 
mechanics  will  be  retained  under  normally  fluctuating  production, 
while  again,  pieceworkers  and  expense  laborers  will  more  or  less 
immediately  feel  the  effect  of  such  fluctuations. 

Using  the  short  cut  method  rather  than  entering  into  an 
extended  mathematical  calculation,  it  will  be  found  that  the 
apparently  unnecessarily  engaged  22,031  persons  divide  them- 
selves as  follows:  — 

Unnecessary  Engagements 


Group 

AU 

New 

Re-Hired 

A 

2,781 

2,031 

750 

B 

3,818 

2,787 

1,031 

C 

7,388 

5,393 

1,995 

D 

7,100 

5,183 

1,917 

E 

944 

689 

25s 

All  22,031  16,083  5,948 

The  factors  which  contribute  mainly  to  the  cost  of  hiring  and 
training  new  employees  must  now  be  analyzed.  This  cost  may 
be  considered  to  result  from: 


468  BUSINESS  STATISTICS 

{a)  Clerical  work  in  connection  with  the  hiring  process; 

(b)  Instruction  of  new  employees  by  foremen  and  assistants; 

(c)  Increased  wear  and  tear  of  machinery  and  tools  by  new 
employees; 

(d)  Reduced  rate  of  production  during  early  period  of  employ- 
ment; and 

(e)  Increased  amount  of  spoiled  work  by  new  employees. 

No  account  is  taken  here  of  the  reduced  profits  due  to  a  reduced 
production,  nor  of  the  investment  cost  of  increased  equipment  on 
account  of  the  decreased  productivity  of  machines  on  which  new 
employees  are  being  broken  in. 

The  hiring  expense  affects  all  groups  of  labor  to  about  the  same 
extent.  It  consists  of  interviewing  apphcants,  taking  their 
records,  making  out  their  engagement  cards  and  other  necessary 
papers,  and  placing  their  names  on  the  payroll  books;  sometimes 
also  advertising  and  traveling  expenses  will  have  to  be  incurred. 
Reduced  to  the  cost  per  individual,  an  expense  of  fifty  cents  for 
each  employee  should  be  a  fair  estimate. 

The  instruction  expense,  on  the  other  hand,  will  vary  largely 
according  to  the  experience  and  skiU  of  the  new  employee  and  the 
nature  of  his  work.  It  will  be  lowest  for  Group  D  and  highest  for 
Group  C  employees,  for  the  latter  must  be  instructed  most  and 
watched  longest.  This  expense  for  Group  B  employees  will  be 
nearly  as  large  as  that  for  Group  C  employees,  not  because  they 
need  as  prolonged  supervision,  but  because  higher  priced  foremen 
will  have  to  give  the  instruction:  Considering  the  quantity  and 
quaHty  of  required  instruction,  this  expense  may  be  assumed  to  be 
for  each  new  employee:  in  Group  A,  seven  dollars  and  fifty  cents; 
in  Group  B,  fifteen  dollars;  in  Group  C,  twenty  dollars;  in 
Group  D,  two  dollars;  and  in  Group  E,  seven  dollars  and  fifty 
cents. 

The  value  of  increased  wear  and  tear  of  machinery  and  tools 
by  new  employees  is  difficult  to  estimate.  It  will  be  little,  if 
anything,  for  employees  in  Groups  D  and  E,  for  whom  it  may  be 
presumed  to  be  one  dollar  per  employee,  while  it  may  reach 
thousands  of  dollars  for  damage  to  expensive  machinery  used  by 
employees  in  Groups  A,  B,  and  C.  Any  estimate  must  be  a  mere 


FACTORY  STATISTICS  469 

guess,  but  it  may  be  conservative  to  assign  ten  dollars  for  each 
employee  in  Groups  A,  B  and  C. 

The  loss  due  to  reduced  production  is  entirely  dependent  upon 
the  value  of  the  article  produced  and  the  experience  and  skill  of 
the  employee  required  for  its  production.  It  will,  of  course,  be 
lowest  for  Group  D  employees,  for  whom  it  may  be  assumed  to 
amount  to  five  dollars  each.  It  can  be  estimated  with  approxi- 
mate correctness  for  other  employees  by  considering  their  average 
wages  and  the  average  loss  of  productivity  during  their  initial 
period  of  employment.  Figuring  overhead  charges  as  100  per  cent 
of  the  wages  of  men  in  Groups  A  and  B,  75  per  cent  of  Groups 
C  and  D  and  40  per  cent  of  Group  E  men,  this  loss  may  be 
assumed  to  amount  to  twenty  dollars  for  each  Group  A,  eighteen 
dollars  for  each  Group  B,  thirty- three  dollars  for  each  Group  C, 
five  dollars  for  each  Group  D,  and  twenty  dollars  for  each  Group 
E  employee. 

The  expense  due  to  spoiled  work  will  similarly  vary  with  the 
value  of- the  raw  material  worked  upon  and  the  labor  expended  in 
such  work.  It  will  amount  to  practically  nothing  for  employees 
in  Groups  D  and  E,  and  may  be  assumed  to  be  ten  dollars  for  each 
Group  A,  fifteen  dollars  for  each  Group  B,  and  ten  dollars  for 
each  Group  C  employee. 

These  cost  items  must  be  reduced  materially  when  they  are 
applied  to  re-hired  employees.  The  cost  of  training  old  employees 
will,  of  course,  be  smallest  when  these  employees  are  put  back  on 
exactly  the  same  or  similar  work  to  that  on  which  they  were 
engaged  before  they  left  employment  in  the  same  factory.  As  a 
matter  of  fact,  many  re-hired  employees  are  put  on  entirely  new 
work,  and  their  training  will  therefore  involve  an  expenditure 
which  will  more  or  less  approximate  that  needed  for  the  training 
of  entirely  new  employees.  Making,  however,  a  conservative 
assumption,  the  cost  of  hiring  and  training  old  employees  may  be 
placed  at  ten  dollars  for  each  Group  A,  twenty  dollars  for  each 
Group  B,  thirty-five  dollars  for  each  Group  C,  five  dollars  for 
each  Group  D,  and  ten  dollars  for  each  Group  E  employee.  The 
respective  totals  of  the  various  cost  items  above  outlined  are 
shown  in  the  following  tabulation:  — 


470  BUSINESS  STATISTICS 


Group 

Hiring 

Instruction 

New  Employees 
Wear  and       Reduced 
Tear        Production 

SpoUed 
Work 

Total 

Re-Hired 
Employees 

A 

$0.50 

$7.50 

$10.00 

$20.00 

$10.00 

$48.00 

$10.00 

B 

.50 

15.00 

10.00 

18.00 

15.00 

58.50 

20.00 

C 

.50 

20.00 

10.00 

33-00 

10.00 

73.50 

35.00 

D 

.50 

2.00 

1. 00 

5.00 

.... 

8.50 

5.00 

E 

•50 

7.50 

1. 00 

20.00 

.... 

29.00 

10.00 

When  these  values  are  multiplied  with  the  number  of  suppos- 
edly unnecessarily  engaged  new  and  re-hired  employees  in  each 
group,  the  result  shows  that  the  apparently  unnecessary  engage- 
ment of  22,031  employees  within  one  year  in  the  twelve  factories 
under  investigation  involved  an  economic  waste  of  $831,030. 
This  amount  will  grow  even  beyond  the  one  million  dollar  mark, 
if  the  decrease  of  profits  due  to  reduced  production,  the  increase 
of  expenses  on  account  of  enlarged  equipment  investment,  and 
the  greater  cost  for  accidental  injuries  and  their  consequences  for 
newly  engaged  employees  are  taken  into  consideration. 

The  important  question  immediately  arises:  how  can  this 
economic  waste  be  avoided  in  the  future  ? 

Preventing  Waste  in  Hiring 

Five  answers  present  themselves : 

1.  A  thorough  study  of  current  employment  statistics  with  a 
careful  analysis  of  the  reasons  for  the  discharge  of  employees  is 
needed  in  order  to  furnish  a  fact  basis  of  local  as  well  as  general 
conditions  on  which  to  predicate  further  action; 

2.  High  grade  men  must  be  placed  in  charge  of  hiring  depart- 
ments and  must  be  given  adequate  authority; 

3.  Proper  methods  must  be  devised  for  taking  care  of  new 
employees,  not  only  in  respect  to  their  technical  training  and 
work,  but  also  in  reference  to  their  personal  characteristics; 

4.  Effective  systems  of  apprenticeship  for  boys  and  girls  and 
of  speciahzed  training  courses  for  adult  employees  must  be 
maintained;  and 

5.  Well-directed  efforts  should  be  made  so  to  regulate  com- 
mercial requirements  as  to  secure  a  fairly  uniform  production 
throughout  the  year. 


FACTORY  STATISTICS  47 1 

It  is  well  known  that  the  explanation  for  an  employee's  separa- 
tion from  the  service,  as  given  by  the  foreman,  cannot  always  be 
relied  upon  because,  when  the  employee  leaves  voluntarily,  he  will 
often  give  an  excuse  rather  than  a  reason  for  his  resignation, 
while  in  case  of  his  discharge  by  the  foreman  the  latter's  personal 
bias  may  sometimes  take  the  place  of  his  good  judgment.  Special 
efforts  should  therefore  be  made  to  get  at  the  real  cause  of  an 
employee's  resignation  or  discharge.  Such  efforts  may  reveal,  for 
instance,  that  the  peculiar  methods  of  a  foreman  readily  dis- 
courage new  employees  from  continuing  in  the  service,  in  which 
case  "  a  word  to  the  wise  "  may  be  sufficient  to  alter  the  foreman's 
tactics  or  other  measures  may  become  necessary  in  order  to  cor- 
rect an  unsatisfactory  condition.  On  the  other  hand,  it  may 
transpire  that  certain  changes  in  the  character  of  work  or  in  the 
conditions  that  surround  the  work  must  be  made  to  attract  and 
keep  satisfactory  employees. 

In  the  light  of  the  above  statements  and  figures  it  must  be 
obvious  also  that  the  highest  grade  of  judgment  in  the  hiring  and 
discharging  of  employees  is  needed.  The  employment  "  clerk  " 
of  today  will  have  to  be  replaced  by  the  employment  "  superin- 
tendent "  of  tomorrow,  not  merely  by  changing  the  title  and 
salary  of  the  incumbent  of  the  office,  but  by  placing  in  charge  of 
this  important  branch  of  management  a  man  whose  character, 
breadth  of  view  and  capacity  eminently  qualify  him  for  the  dis- 
charge of  these  duties.  Second  in  importance  to  the  manager  of 
the  plant  should  be  his  assistant  who  is  entrusted  with  the  duty  of 
bringing  into  the  plant  the  men  and  women  who  are  needed  for 
the  proper  performance  of  work,  and  of  keeping  them  in  the 
employment  as  contented  and  efficient  employees. 

While  it  is  quite  important  to  select  the  right  men  and  women 
for  the  right  places  so  that  a  square  peg  may  be  chosen  for  a  square 
hole  and  a  round  peg  for  a  round  hole,  it  is  far  more  important 
properly  to  take  care  of  these  men  and  women  when  they  enter 
upon  their  new  work.  A  good  man  can  be  spoiled  and  discouraged 
by  wrong  initial  treatment,  as  an  improperly  selected  man  can 
often  be  made  useful  and  contented  by  the  right  guidance  and 
training.    An  understanding  of  human  nature,  and  fairness  and 


472  BUSINESS  STATISTICS 

firmness  in  dealing  with  men  are  some  of  the  chief  requisites  of  the 
efficient  superintendent  of  employment.  A  student  of  economics 
applied  to  industry,  he  must  be  imaginative  enough  to  be  pro- 
gressive and  yet  sufficiently  conservative  not  to  break  away  from 
old  moorings  before  he  has  found  a  clear  course  ahead.  Standing 
between  the  employees  and  their  employer,  he  can,  if  he  is  the 
right  man,  work  to  the  advantage  of  both  by  being  fair  to  both. 
And  if  he  possesses  tact  and  diplomacy  he  will  never  destroy  the 
disciplinary  authority  of  the  foreman  even  though  the  latter  is 
deprived  of  the  right  to  discharge  an  employee  beyond  terminat- 
ing at  any  time  the  latter's  connection  with  his  department. 
Since  the  superintendent  of  employment  has  brought  the  em- 
ployee into  the  factory,  he  ought  to  be  the  one  to  discharge  him 
if  he  should  be  discharged.  Often  he  may  find  that  the  em- 
ployee's unsatisfactory  showing  was  due  to  his  having  been  placed 
wrongly.  How  much  better  to  take  this  square  peg  out  of  a 
round  hole  and  fit  him  into  a  vacant  square  hole  than  to  dis- 
charge him  and  then  experiment  with  another  recruit,  a  sup- 
posedly square  peg  ?  Sometimes,  where  all  blame  cannot  be 
apportioned  to  the  employee,  his  first  offense  can  be  condoned 
and  he  can  be  placed  under  surroundings  which  will  be  more 
favorable  to  his  useful  development.  Again,  at  times  the  dis- 
charge of  an  employee  may  not  only  be  justified  but  such  em- 
ployee ought  to  be  made  to  feel  in  no  uncertain  way  the  disgrace 
of  his  action.  Even  in  this  instance,  however,  a  wise  superintend- 
ent of  employment  will  fire  the  employee  in  such  a  manner  that 
the  latter  will  greatly  feel  the  sore  spot  without  harboring  at  the 
same  time  hateful  resentment  against  his  employer.  A  friendly 
public  opinion  of  a  community  is  a  great  asset  to  an  employer 
and  particularly  to  a  corporation;  care  should  therefore  be  taken 
that  it  be  not  easily  disturbed. 

The  employer  can  further  help  to  develop  a  good  relationship 
with  his  community  by  offering  to  some  of  the  boys  and  girls  of 
his  own  employees  or  of  other  local  citizens  an  opportunity  to 
prepare  in  his  factory  for  a  useful  industrial  life.  It  is  becoming 
recognized  again,  as  it  was  decades  ago,  that  the  employer  has  a 
peculiar  duty  to  perform  toward  his  employees  and  himself  as 


FACTORY  STATISTICS  473 

well  as  the  industry,  by  offering  to  train  and  by  properly  training 
the  youth  of  the  land  who  wish,  or  by  circumstances  may  be 
obliged  to  choose  a  vocational  career  for  a  livelihood.  Sometimes 
by  his  own  action,  sometimes  in  cooperation  with  educational 
institutions,  but  always  in  sympathetic  support  of  the  well- 
meant  efforts  of  school  authorities,  he  should  see  to  it  that  the 
young  men  and  women  whom  he  is  training  become  intelligent, 
skillful  and  contented  workers  and  leaders  in  the  constantly  grow- 
ing industrial  army.  Although  to  a  certain  extent  all  employers 
take  an  interest  in  this  problem  of  providing  an  adequate  supply 
of  properly  trained  workers,  most  of  them  have  not  yet  discovered 
that  it  is  essentially  worth  their  while  to  set  aside  a  generous 
amount  of  their  busy  time  and  to  devote  appropriate  effort  and 
financial  support  for  this  work. 

Finally,  as  to  the  last  suggested  remedy,  that  of  a  fairly  evenly 
distributed  production  throughout  the  year,  the  problem  looks 
somewhat  simple  although  it  is  fraught  with  many  difficulties 
that  arise  from  the  fact  that,  after  all,  the  buying  public  is  the 
real  master  of  this  situation.  The  employer  can,  however,  in- 
fluence the  public  in  many  ways,  by  educational  propaganda  or 
by  the  offer  of  advantageous  trade  prices,  to  help  him  in  his  effort 
for  a  standardization  of  his  products,  so  that  he  may  be  able 
to  manufacture  for  stock  for  future  need  as  well  as  for  im- 
mediate delivery,  and  through  it  to  maintain  fairly  steady  work 
throughout  the  whole  year.  He  may  well  share  with  the  public 
and  with  his  employees  the  advantages  accruing  to  him  from 
a  wholesale  production  and  the  resulting  steady  work  for  his 
employees. 

Along  the  five  lines  of  remedy  herein  suggested  may  be  found 
the  solution  of  a  problem  which  is  beginning  to  loom  large  before 
our  eyes  and  will  look  larger  as  international  competition  grows 
keener.  In  presenting  the  results  of  my  investigation  into  the 
waste  of  hiring  and  firing  employees,  I  have  made  no  effort  to 
paint  a  black  picture  but  have  merely  presented  the  varied  colors 
of  the  industrial  spectrum.  I  have  pictured  what  seems  to  be  an 
average  condition  throughout  the  country,  indicative  of  defects 
in  our  factory  system  that  challenge  immediate  attention. 


474  BUSINESS  STATISTICS 

In  view  of  certain  legislative  and  administrative  tendencies 
now  affecting  American  industries  it  is  important  also  to  reflect 
that  constant  fluctuation  in  the  working  force  of  an  establish- 
ment must  materially  increase  the  difficulty  of  maintaining  among 
the  employees  a  spirit  of  loyalty  to  the  management,  esprit  de 
corpSj  and  general  contentment.  Just  as  quicksand  cannot  be 
kneaded  in  the  hands  into  a  solid  lump,  so  also  will  it  be  found 
difficult  to  take  hold  of  an  ever-changing  mass  of  employees  and 
transform  it  into  a  homogeneous,  intelligent,  contented  body. 
Moreover,  this  condition  will  tend  to  nullify,  to  a  large  degree,  the 
beneficial  effects  of  many  well-intentioned  efforts  of  employers, 
such  as  sickness  and  accident  insurance  plans,  old  age  pension 
systems,  and  other  phases  of  industrial  betterment  work. 

And  last,  but  not  least,  the  problem  herewith  presented  offers 
an  opportunity  for  constructive  work  in  which  employers  and 
employees  can  readily  be  brought  together  for  mutual  benefit; 
for  no  right-thinking  man,  whatever  his  position  or  affiliation, 
can  justly  object  to  any  well-directed  plan  which  seeks  to  give 
employees  continuous  work  throughout  the  year  and  to  enable 
employers  to  maintain  steady  production. 

Close  analysis  of  the  men  and  women  whom  we  take  into  our 
employ,  effective  systems  under  which  we  train  them  in  our  work, 
fair  treatment  while  they  are  in  our  service,  and  adequate  methods 
to  insure  their  dismissal  only  for  justified  cause  or  their  voluntary 
withdrawal  with  no  ill-feeling  toward  their  employer  —  these  are 
essential  factors  in  our  problem  of  "  hiring  and  firing  "  and  must 
be  our  earnest  concern  lest  we  waste  money  in  our  businesses  and 
sacrifice  friendly  relationship  with  our  employees. 

IX.  A  Graphical  Daily  Balance  in  Manufacture  ^ 

By  H.  L.  Gantt 

I .  At  the  December  meeting  in  1901  the  writer  presented  a  paper 
entitled  "  A  Bonus  System  of  Rewarding  Labor,"  in  which  was 
given  an  account  of  the  results  gotten  under  that  system  at  the 

^  Transactions  of  American  Society  of  Mechanical  Engineers,  vol.  24,  pp.  1322- 
133 1.  Reprinted  by  permission  of  the  American  Society  of  Mechanical  Engineers. 
Illustration  of  one  form  is  omitted. 


FACTORY  STATISTICS  475 

works  of  the  Bethlehem  Steel  Company,  and  a  description  of  the 
method  employed. 

The  paper  dealt  particularly  with  the  method  of  setting  a  task 
and  with  the  reward  for  its  accomplishment.  It  consisted  briefly 
in  setting  as  a  task  for  a  day's  work  the  amount  that  a  good  man 
could  reasonably  be  expected  to  accomplish,  and  paying  the  man 
a  substantial  amount  in  addition  to  his  day's  wages  if  the  whole 
amount  was  done.  If  less  than  that  amount  was  done  he  simply 
got  his  day's  wages. 

The  result  of  this  system,  when  the  task  was  set  in  an  intelh- 
gent  manner  and  accompanied  by  a  suitable  compensation,  was 
an  efficiency  of  operation  so  far  beyond  that  obtained  by  the 
ordinary  day  or  piecework  method  that  it  attracted  a  great  deal 
of  attention. 

This  centering  of  the  attention  on  the  result  had,  however,  a 
serious  disadvantage,  for  it  withdrew  the  attention  from  the 
most  important  parts  of  the  paper  —  namely,  that  describing  the 
method  of  setting  the  task,  and  that  referring  to  the  method  of 
operating  the  system  by  which  an  exact  record  was  kept. 

The  method  of  setting  the  task  is  substantially  that  developed 
by  Mr.  Fred  W.  Taylor  for  setting  piece-rates,  and  was  described 
at  some  length.  His  paper  before  the  present  meeting  further 
elucidates  that  part. 

The  routine  operation  of  the  system,  which  involves  keeping  an 
exact  daily  record  of  the  work  done,  was  not,  however,  so  clearly 
explained,  and  it  is  to  that  subject  that  this  paper  is  devoted. 

2.  Man^s  Record.  In  order  to  operate  such  a  system  we  must 
not  only  have  an  exact  record  of  what  each  workman  does  every 
day  in  order  to  find  out  whether  he  has  earned  his  bonus  or  not, 
but  must  have  beforehand  an  exact  knowledge  of  the  work  to  be 
done  and  how  it  is  to  be  done.  This  amounts  to  keeping  two  sets 
of  balances:  one,  of  what  each  workman  should  do  and  did  do; 
the  other,  of  the  amount  of  work  to  be  done  and  is  done.  The 
former,  or  man's  record,  is  concerned  with  the  payment  of  the 
bonus,  and  consists  in  an  exact  comparison  of  what  should  be 
done  as  determined  by  our  investigations,  and  what  has  been 
done  as  shown  by  the  daily  reports. 


476  BUSINESS  STATISTICS 

3.  Daily  Balance  of  Work.  The  latter  is  a  balance  of  work  on 
each  order,  and  should  show  at  a  glance  each  day  just  what  has 
been  done  and  what  remains  to  be  done,  in  order  to  enable  us  to 
lay  out  the  work  for  the  next  day  in  the  most  economical  man- 
ner. The  importance  of  such  a  balance  has  been  long  recognized, 
but  the  difficulty  of  getting  it  is  such  that  it  has  seldom  been 
attempted.  Many  concerns  get  a  weekly  or  monthly  balance; 
but  in  both  of  these  cases  the  information  is  usually  obtained  too 
late  to  prevent  delays  in  work.  Again  the  value  of  a  balance  is 
dependent  largely  upon  its  availability;  in  other  words,  upon  the 
ease  with  which  the  desired  information  can  be  obtained  from  it. 
With  this  idea  in  mind  the  writer  devised  a  combined  schedule  for 
work  and  a  balance  sheet  that  is  largely  graphical  in  its  nature. 
On  it  dates  are  represented  by  positions,  and  when  work  is  not 
done  on  consecutive  days,  there  are  no  entries  in  consecutive 
positions.  This  practice  enables  the  foreman  or  superintendent 
to  see  at  a  glance  what  work  is  going  along  properly.  Such 
schedules  can  be  made  out  for  all  classes  of  work,  and  a  de- 
scription of  one  or  two  will  amply  illustrate  the  principle. 

4.  A  Foundry  Balance.  Figure  I  represents  such  a  balance 
sheet  and  schedule  for  a  foundry.  At  the  heads  of  the  various 
vertical  columns  are  the  names  of  the  pieces  to  be  cast;  under  each 
is  its  pattern  number;  then,  in  order,  when  the  pattern  is  due  at 
the  foundry,  when  it  is  received,  the  number  wanted  per  day,  and 
the  total  number  wanted.  Below,  each  column  is  divided  into 
two  columns  headed  daily  and  total.  These  are  crossed  by  hori- 
zontal lines  representing  consecutive  working  days,  on  each  of 
which  is  entered  in  the  proper  column  the  number  of  pieces  made 
that  day  and  the  total  number  made  to  that  date.  Each  column 
is  crossed  by  two  heavy  horizontal  lines,  the  upper  one  opposite 
the  date  at  which  the  work  should  be  begun,  and  the  lower  one 
opposite  the  date  at  which  the  work  should  be  completed.  These 
lines  are  usually  red,  and  have  been  very  appropriately  named 
danger  lines.  The  position  of  the  entries  with  reference  to  these 
danger  lines  and  the  amounts  of  those  entries  show  to  what  extent 
the  schedule  is  being  lived  up  to.  If  the  schedule  is  being  well 
followed  the  entries  are  always  in  the  neighborhood  of  the  red 
lines,  or  above  them. 


Begin  moulding  not  later  than  date  opposite  upper  heavy  line. 

S 
5 
► 

§ 

o 

2 

o  — 

6° 

_ 
— 

- 

i2 

00 

to 

00 

w 



00 

S5 
to 
to 
ts 

to 

to 

00 

a, 

oc 

o 

c 
to 

X 

to 

OS 

00 

_ 

to 

3» 

to 

00 
00 

00 

00 

00 

CO 

-3 

CO 

OS 
to 

OS 

to 
to 

crt 

00 

to 

>(>■ 

to 

or 

1^ 

lISi. 

00 

o 
to 

CO 

o 

CO 

CO 

OS 

to 
to 

•»3 

to 
to 

-J 

1 

to 

to 

09 

CO 

pi 

to 

z 
c 

03 

m 

3 

o 

c 

p 

1 

r 

i 

1 

m 

p 

i 

H 
m 
o 

3 

< 

3 

m 

■33 

z 

30 

s 

p 

H 

m 

30 

z 

o 

c 

m 

z 

? 

H 

C    " 

SB 

C 

1 

00 

- 

i: 

I- 
O 

^ 

E 

«<" 

00 

t-i 

s 

r 

5 

§ 

o 

1 

►  2? 

00 

- 

r 

f 

to 

p 

■H 

1 

to 

- 

»-* 

00 

- 

r 

r 

1 

■as 

3^ 

"" 

- 

- 

5^ 

1 

«< 

£ 

00 

I 

I 

1 

El 

S.3 

"9 

t 

«<" 

OS 

to 

I 

o 

to 

J, 

s 

If 

1 

5 
f 

oc 
to 

<> 

to 

05 

to 

CO 
CO 

to 

CO 

CO 

^ 
^ 
^ 

- 

- 

- 

- 

- 



o> 

to 

f 

to 

1 

1 

1 

00 

1-* 

I 

1 

^^ 

!Z 
H 

o 

t 

o  — 

00 

- 

r 

I 

to 

r^ 

i 

1 

OD 

-» 

o» 

- 

— 

o* 

00 

to 

to 

CO 
M 

to 
to 

^3 

— 

- 

— 

— 

— 

— 

— 

— 

s. 

oo 

- 

3! 

I 

« 

si? 

^ 

00 

r 

I 

i 

1 

FACTORY  STATISTICS  477 

Figure  I  represents  a  portion  of  an  actual  order  showing  how 
it  was  filled  in  the  foundry  of  the  Schenectady  works.  If  there  is 
no  graphical  check  on  the  operations  of  the  foundry,  the  work 
that  is  wanted  during  a  certain  week  may  be  spread  over  three 
or  four. 

It  is  an  extremely  difficult  matter  for  a  foreman  to  get  the  work 
done  exactly  in  the  order  it  is  wanted.  For  instance,  if  we  are 
building  two  locomotives  per  day,  each  requiring  four  driving 
boxes,  it  seems  an  extremely  difficult  thing  for  him  to  get  every 
day,  without  fail,  at  least  eight  driving  boxes.  There  is  a  con- 
stant tendency  when  he  is  rushed  with  work  to  drop  to  seven  or 
six  with  a  corresponding  decrease  in  output  of  locomotives.  This 
tendency  to  give  about  what  is  wanted  rather  than  exactly  what 
is  wanted  is  the  most  common  obstacle  to  getting  the  full  output 
of  a  plant. 

5.  A  Daily  Balance  as  a  Permanent  Record.  This  balance  sheet 
shows  not  only  how  much  work  was  done  each  day,  but  is  a 
permanent  record  of  exactly  how  the  order  was  filled,  which  can 
be  compared  with  the  record  of  the  previous  and  subsequent 
orders.  This  is  best  illustrated  by  a  study  of  Figure  I,  which 
shows  exactly  where  failure  to  comply  with  the  schedule  occurred. 
The  letter  P  entered  in  some  of  the  columns  shows  graphically 
the  reason  for  the  castings  being  behind.  The  pattern  was  not 
received  until  the  date  indicated.  Similar  sheets  might  show  that 
it  was  the  draftsman  and  not  the  pattern-maker  who  was  to 
blame. 

6.  A  Machine  Shop  Balance  and  Routing  Sheet.  Figure  II  is  a 
similar  balance  sheet  for  work  done  in  a  machine  shop  on  a  series 
of  locomotive  frames  and  rails.  The  order  in  which  the  various 
operations  are  to  be  performed  has  been  determined,  and  the 
consecutive  columns  devoted  to  the  operations  in  their  proper 
order.  You  will  note  that  on  this  sheet,  which  is  an  actual 
record  of  work,  the  consecutive  operations  were  performed 
promptly,  and  that  there  was  no  serious  delay. 

Figure  III  represents  a  record  of  the  same  work  as  it  would 
appear  if  the  works  were  short  of  frame-drilling  capacity  and  the 
drilling  of  frames  were  not  done  promptly.    If  it  is  impossible  to 


478  BUSINESS  STATISTICS 

make  up  the  delay  thus  caused,  the  output  is  limited  by  it.  Such 
sheets  show  at  a  glance  where  the  delays  occur  and  indicate  what 
must  have  our  attention  in  order  to  keep  up  the  proper  output. 
If  the  delay  is  always  on  the  same  operation,  we  know  that  we 
must  either  get  more  output  from  the  machines  doing  that  work, 
or  get  more  machines.  Lines  representing  when  work  should  be 
begun  and  when  it  should  be  finished  are  used  on  the  machine- 
shop  sheets  as  well  as  on  the  foundry  sheet,  but  have  been  left 
off  to  avoid  confusion. 

7.  A  Graphical  Balance  as  a  History.  A  complete  set  of  such 
sheets  for  all  the  work  being  done  in  a  plant  gives  a  complete 
schedule  and  a  daily  record  of  what  is  being  done  and  is  of  the 
greatest  possible  advantage,  if  an  attempt  is  to  be  made  to  im- 
prove the  conditions  or  increase  the  output  of  the  plant.  In  fact, 
if  the  improvement  in  the  operation  of  a  plant  is  to  be  made  in  a 
scientific  manner,  exact  knowledge  of  what  is  taking  place  each 
day  is  absolutely  necessary.  Without  it  money  is  often  spent 
wastefully,  and  but  a  small  proportion  of  the  desired  results 
obtained.  In  large  plants  run  without  such  a  system  of  balances 
it  is  frequently  impossible  to  tell  just  what  is  holding  back  the 
output,  and  then  the  value  of  such  a  balance  is  out  of  all  propor- 
tion to  the  cost  of  obtaining  it.  By  using  the  graphical  form  its 
value  is  very  much  increased,  for  the  general  appearance  of  the 
sheet  is  sufficient  to  tell  how  closely  the  schedule  is  being  lived 
up  to;  in  other  words,  whether  the  plant  is  being  run  efficiently 
or  not.  Moreover,  such  a  balance  is  a  history  of  the  way  the  work 
went  through  the  shop  and  is  readily  comparable  with  similar 
work  done  previously  or  subsequently,  thus  enabling  us  to  form  a 
definite  idea  as  to  whether  the  plant  is  being  run  more  or  less 
efficiently.  The  balance  of  work,  sheet  then  gives  us  a  daily 
analysis  of  how  the  work  is  progressing,  and  in  its  graphical  form 
is  so  easily  read  that  both  foremen  and  superintendents  find  it  of 
great  value.  The  man's  record  shows  the  efficiency  of  each  man, 
and  the  two  taken  together  give  us  the  knowledge,  in  the  clearest 
way,  of  what  should  be  done  to  increase  our  output. 

8.  Value  of  Balance  not  Dependent  upon  Method  of  Compensa- 
tion.   It  is  not  the  intention  of  this  paper  to  discuss  the  making 


ET 
*  No.  1. 


ORDER  No.  77 
16  ENGINES  N.Y.a 


RAILS. 


Lc'B 

Planed 

Slotted 

Rb-Pl-Top 

Rk-Pl-Bot 

Drtt.i.bd 

; 

1 

30 

30 

30 

15 

15 

30 

TOTAL 

DAILY 

TOTAL 

DAILY 

TOTAL 

DAILY 

TOTAL 

DAILY      TOTAL 

DAILY 

TOTAL 

6 

1    12 

6 

6 

4 

10 

2 

12 

4 

1     18 

4 

16 

1 

1 

1 

1 

4 

8 

3 

4 

3 

4 

1    22 

4 

20 

10 

1     26 

4 

24 

14 

2 

6 

2 

6 

4 

4 

1 

7 

1 

7 

4 

8 

130^ 

2 

26 

18 

2 

9 

2 

9 

r^ 

2 

28 

4 

22 

1 

10 

1 

10 

2 

.SO 

G 

28 

3 

13 

3 

13 

2 

10 

2 

30 

1      2 

15 

2 

15 

4 

14 

r^ 

4 

18 

6 

24 

4 

28 

2 

30 

T. 

• 

I 

FACTORY  STATISTICS  479 

of  schedules  for  doing  work,  or  instruction  cards  for  the  workmen 
to  follow,  or  indeed  the  subject  of  compensation  for  work  done, 
for  the  keeping  of  a  daily  balance  of  work  done  and  a  record  of 
the  men  doing  it  are  invaluable,  no  matter  what  the  method  of 
compensation.  In  fact,  the  writer  has  found  the  man^s  record 
when  work  was  done  by  the  day  to  be  of  the  highest  value,  for 
when  the  men  realize  that  not  only  their  chance  for  increase  of 
wages,  but  that  of  holding  their  positions  depends  upon  the 
amount  and  quality  of  their  work,  they  become  very  much  more 
ejficient.  Add  to  this  the  fact  that  efficient  men  paid  in  propor- 
tion to  their  efficiency  are  invariably  better  satisfied  than  less 
efficient,  cheaper  men,  and  we  have  an  added  reason  for  keeping 
the  man's  record.  Again  a  workman  easily  forgets  how  many 
days  he  has  been  absent,  and  how  much  poor  work  he  has  done 
and  an  occasional  glance  at  his  record  often  does  him  a  great  deal 
of  good.  The  writer  first  kept  such  a  record  in  the  foundry  of  the 
Midvale  Steel  Company  thirteen  years  ago,  and  found  it  so  valu- 
able that  he  has  always  done  it  since  when  possible.  Such  record 
sheets  are  so  easily  gotten  up  and  of  so  many  kinds  that  the  writer 
has  not  considered  it  necessary  to  illustrate  them. 

9.  The  Graphical  Balance  and  the  Foreman.  Next  to  the  super- 
intendent the  most  overworked  people  in  the  ordinary  manufac- 
turing plant  are  the  foremen.  Their  duties  may  be  summed  up  as 
follows,  in  the  order  of  their  importance :  to  get  their  work  out  on 
time;  to  get  it  out  economically;  to  improve  their  methods. 
Add  to  their  primary  duties  a  multitude  of  others  depending 
upon  them,  and  but  little  time  is  left  for  thought,  or  investigation, 
on  which  depends  improvement.  When  they  are  rushed,  there- 
fore, improvement  is  naturally  the  first  thing  to  suffer.  Further 
pushing  causes  economy  to  be  sacrificed,  for  the  work  must  get 
out,  and  the  foreman  has  not  time  to  go  over  and  over  his  orders 
to  see  just  what  is  the  most  economical  arrangement  of  his  work. 
Here  is  where  the  graphical  schedule  comes  to  his  assistance,  for 
he  can  see  at  a  glance  just  what  is  behind  or  what  should  be  done 
next.  There  has  been  but  little  difficulty  in  getting  foremen  to 
recognize  the  value  of  such  a  balance,  and  I  have  yet  to  learn  of 
one,  who,  having  gotten  such  a  sheet  in  full  operation,  was  willing 
to  give  it  up. 


480  BUSINESS  STATISTICS 

10.  Cost  of  Keeping  Balances.  The  question  is  frequently  asked 
as  to  the  cost  of  keeping  these  records  and  balances.  In  reply 
I  have  to  say  that 'if  such  cost  were  ten  times  what  it  is,  it  would 
cut  no  figure. 

In  day  work  we  buy  a  man's  time,  and  he  frequently  gives  but 
little  else.  Our  storekeeper  checks  exactly  the  materials  we  buy 
but  nobody  knows  exactly  what  the  day  workman  has  done  in 
his  ten  hours;  although  we  know  labor  to  be  the  most  difficult 
commodity  we  have  to  buy,  we  give  it  the  least  systematic  study, 
and  my  effort  to  get  an  exact  record  of  what  we  get  for  our  money 
is  the  first  step  toward  purchasing  it  in  an  intelligent  manner. 
With  regard  to  the  balance  of  work,  I  can  only  say  that  it  is  hard 
to  estimate  the  cost  of  lack  of  harmony  in  a  plant,  and  the  increase 
in  efficiency  produced  by  getting  materials  in  their  proper  order 
rather  than  according  to  the  judgment  of  the  various  foremen  is 
greater  than  is  usually  realized. 

The  fact  that,  as  far  as  the  writer's  experience  goes,  the  fore- 
men are  not  only  willing  to  use  these  graphical  sheets,  but  are 
glad  to  do  so  in  order  to  make  their  work  harmonize  with  that 
of  other  departments,  is  the  strongest  proof  of  the  value  of  the 
graphical  over  the  other  forms  of  balance.  9 

The  value  of  a  balance  of  some  sort  is  too  well  understood  to 
need  discussion,  and  the  only  reason  that  it  has  not  been  adopted 
is  often  the  fancied  cost  of  getting  it.  As  a  matter  of  fact,  all 
I  have  suggested  can  usually  be  gotten  by  the  ordinary  time  and 
cost  keeping  force  with  but  little  help,  and  frequently  without 
any.  It  is  so  closely  allied  to  the  time  and  cost  keeping  that 
when  all  are  done  together  by  the  best  modern  method,  the 
reduction  of  labor  in  getting  the  time  and  cost  often  more  than 
offsets  the  increase  due  to  keeping  the  men's  records  and  the 
balance  of  work.  The  method  referred  to  is  the  time  and  pro- 
duction card  system,  of  which  the  following  is  a  description. 
There  are  conditions  under  which  the  system  to  be  described  here 
may  be  modified;  in  fact,  it  is  not  always  found  possible  to 
introduce  it  exactly  as  described,  which,  however,  is  the  ideal 
method  of  operating  it  and  should  be  approximated  as  nearly 
as  possible.    It  was  first  introduced  substantially  in  this  form 


5 
c 

ET. 

>P    NO.    1. 

ORDER  No.  77 
15  ENGINES   N.TC. 

RAILS. 

i 

s 

ec'd 

Planed 

Slotted 

Rb-pl-top 

Rk-pl-bot 

Drilled 

30 

30 

30 

15 

15 

30 

. 

f    TOTAL 

DAILY 

TOTAL 

DAILY 

TOTAL 

DAILY 

TOTAL 

DAILY    TOTAL 

DAILY 

TOTAL 

6 

1                 1 

1     12 

6 

6 

1 

1                 1 

4 

10 

• 

1 

2 

12 

1         4 

1 

1 

1     18 

4 

16 

1 

1         1 

1       1         1 

1 

8 

3 

4 

3    1      4 

1 

1     22 

4 

20 

10 

1           1 

1 

1     26 

4 

24 

14 

2 

6 

2    1      6 

4     1      4 

' 

1 

7 

1     1      7 

4    1      8 

1    30 

2 

26 

18 

2 

9 

2    1      9 

1 

2 

28 

22 

1 

10 

1     1    10 

1 

2 

30 

6 

28 

3 

13 

3    1     13 

2   1   m 

2 

30 

2 

15     1 

2     1     15 

4     1     14 

1 

4     1     18 

1 

6     1    24 

1 

4     1    28 

1 

1 

1 

2 

30 

1 

■ 

1 

1 

1 

1 

1 

1 

1 

1 

1 

1 

1 

1 

1 

1 

1            1 

1 

1 

1 

1            1 

1 

This! 

'able 

SHOWS 
ERE  SH 

THE  -H 
ORT  OI 

tjlY  Fi< 

i-FRAM 

3.  Ill 
eDri 

tVOULD 
LLING 

LOOK  IP  THE 

Capacity. 

WORB 

.S 

FACTORY  STATISTICS  481 

by  Mr.  Fred  W.  Taylor  at  the  works  of  the  Bethlehem  Steel 
Company. 

1 1 .  Time  and  Production  Card  System.  In  its  best  development, 
a  card  is  assigned  the  day  previous  to  every  man  who  is  expected 
in  at  7  A.M.  the  next  day.  Each  of  these  cards  is  stamped  with 
a  rubber  stamp  7  a.m.  and  the  date.  These  cards  are  placed  in  a 
rack,  which  has  a  properly  numbered  space  for  each  man,  who 
takes  from  it  his  own  card  and  no  other.  Any  men  coming  in 
after  7  a.m.  are  not  allowed  access  to  the  rack,  but  must  get  their 
cards  from  the  office,  where  the  cards  are  marked  properly  by  a 
time  stamp  with  the  exact  time  each  man  comes  in. 

Without  any  delay  each  man  goes  directly  to  the  work  that  has 
been  assigned  to  him,  and,  while  his  machine  is  running,  fills 
in  on  the  card  his  name,  his  number,  the  order  number,  the 
machine  number  and  the  kind  of  work  he  is  doing.  At  the  end 
of  the  day  he  enters  on  his  card  the  number  of  pieces  that  have 
been  correctly  finished,  and  the  card  is  signed  by  the  foreman  or 
inspector,  certifying  that  all  of  the  entries  are  correct.  If  there 
have  been  errors  in  the  work  the  foreman  or  inspector  does  not 
sign  the  time  card,  but  makes  out  a  supplementary  card  stating 
the  exact  nature  of  the  errors,  etc.,  and  pins  this  card  to  the  time 
card. 

At  the  end  of  the  day,  or  at  noon,  the  men  are  allowed  access 
to  the  card  racks  as  soon  as  the  whistle  has  blown,  and  each  man 
deposits  his  card  in  the  proper  pocket,  an  observer  noting  that  a 
man  deposits  one  card  only. 

Men  coming  in  after  noon  get  their  cards  in  the  same  manner 
as  in  the  morning;  the  cards  being  previously  stamped  with  the 
hour  work  begins,  and  placed  in  the  rack.  Men  who  do  not  go 
out  at  noon  do  not  need  to  change  their  cards. 

When  the  men  have  gone  out  at  the  end  of  the  day  or  at  noon, 
the  cards  in  the  rack  are  stamped  by  means  of  a  rubber  stamp 
with  the  time  the  work  ends. 

The  preferable  form  of  card  is  a  square  one  on  paper  stout 
enough  to  be  shuffled.  In  the  upper  right-hand  corner  of  the 
card  should  be  placed  the  man's  number,  the  order  number  and 
the  machine  number. 


482  BUSINESS  STATISTICS 

As  there  is  room  for  one  order  number  and  one  machine  number 
only  on  one  card,  the  workman  must  give  in  his  card  at  the  office 
and  get  a  new  one  whenever  he  goes  either  on  a  new  order  or 
another  machine. 

12.  Time  and  Man^s  Record.  In  order  to  get  a  record  of  the 
man's  time  and  work  for  the  day,  all  the  cards  bearing  his  number 
must  be  gotten  together.  If  these  do  not  give  a  total  of  the  full 
number  of  working  hours,  the  first  card  of  the  day  must  show  that 
he  was  late,  or  there  must  be  a  pass  stating  what  time  he  went  out. 
These  passes  should  be  of  the  same  size  as  the  cards,  and  be  put 
in  with  the  time  cards  and  sorted  out  by  the  man's  number,  so 
that  when  the  clerk  begins  to  enter  the  time  and  record  he  will 
have  all  the  information  at  hand.  The  man's  record  may  serve 
as  a  pay  sheet,  thus  involving  only  one  set  of  entries.  When  the 
time  is  entered  up,  the  clerk  doing  it  enters  his  initial  in  the  lower 
left-hand  comer  in  the  space  marked  "  pay  sheet." 

13.  Cost.  To  get  the  cost  on  an  order  the  cards  are  then  sorted 
by  "  order  number,"  and  when  the  clerk  begins  to  enter  up  the 
time  or  wages  against  any  order,  he  should  have  before  him  all 
the  cards  representing  work  on  that  order.  He  is  thus  enabled 
to  make  the  final  entry  directly  from  the  cards,  thus  doing  the 
work  with  a  minimum  of  clerical  labor.  The  clerk  enters  his 
initial  in  the  space  designated  for  such  entry  on  "  cost  sheet." 

14.  Progress  or  Production.  To  get  a  record  of  the  work  on  any 
order,  the  cards  which  have  been  sorted  by  order  number  are 
further  sorted  by  name  of  part  and  operation.  We  thus  get 
together  the  cards  showing  on  an  order  the  number  of  pieces  on 
which  a  certain  operation  has  been  finished  that  day.  These 
are  added  up  and  entered  directly  on  the  Production  or  Progress 
sheet.  By  this  method  we  can  keep  an  intelligible  record  of  all 
the  work  done  with  a  minimum  of  clerical  labor. 

15.  Difficulty  of  Getting  a  Daily  Balance.  It  is  not  necessary 
for  the  purpose  I  have  in  mind  to  dwell  further  on  the  details,  my 
object  being  only  to  show  that  the  difficulty  of  getting  this  daily 
record  of  our  men  and  a  balance  of  work  done  is  not  so  great  as 
to  be  prohibitory.  In  other  words,  it  is  an  entirely  feasible  thing 
to  know  exactly  all  that  has  been  done  in  a  large  plant  one  day 


I 


FACTORY  STATISTICS  483 

before  noon  of  the  next,  and  to  get  a  complete  balance  of  work  in 
order  to  lay  out  that  afternoon  in  a  logical  manner  the  work  for 
the  next  day. 

16.  Valiie  of  such  a  Balance.  The  value  of  such  a  balance  con- 
sists in  the  fact  that  it  makes  clear  details  that  no  observer,  how- 
ever keen  he  may  be,  can  see  by  inspection.  It  shows  us  what 
work  is  behind  and  how  much,  and  enables  us  to  trace  to  its  source 
the  cause  of  any  delay.  The  superintendent  sees  at  a  glance 
what  he  never  could  find  out  by  observation  or  by  asking  ques- 
tions. It  shows  him  how  efficiently  a  plant  is  being  run  and 
where  the  defects  in  operation  are.  In  connection  with  the  man's 
record,  it  is  the  most  complete  analysis  we  can  make  of  the  work- 
ing of  a  plant,  and  the  one  that  will  help  us  most  quickly  to  bring 
into  their  proper  channels  things  that  have  been  going  hap- 
hazard. Such  an  analysis  is  far  more  important  than  an  improved 
tool  steel  or  a  new  set  of  piece-rates.  It  should  be  established 
before  the  introduction  of  either  of  these  in  order  that  we  may 
have  some  means  of  measuring  the  gain  made  by  their  introduc- 
tion, and  it  should  remain  after  they  are  introduced  to  show  that 
a  forward  step  once  taken  is  never  retraced. 

1 7.  Accounting  and  Operating.  In  conclusion  the  writer  wishes 
to  say  that  it  is  his  opinion  that  we  can  do  nothing  in  a  manu- 
facturing plant  that  will  go  so  far  toward  increasing  the  output 
or  the  economy  of  operation  as  obtaining  this  exact  knowledge 
of  what  is  being  done.  The  cost  of  getting  it  is  almost  nothing, 
and  the  methods  of  operation  need  not  be  disturbed  in  the  least 
until  an  accumulation  of  knowledge  points  out  the  best  course  to 
pursue. 

By  the  adoption  of  the  methods  outlined  the  accounting 
department  ceases  to  be  simply  a  critic  of  the  manufacturing,  and 
becomes  an  active  assistant  to  every  foreman  and  to  the  super- 
intendent. In  other  words,  the  accounts  cease  to  be  simply 
records  of  production,  and  become  potent  factors  in  helping  the 
producing  departments. 

18.  The  Bonus  System  a  Form  of  Profit  Sharing.  Having 
established  these  combined  order,  schedule,  and  production 
sheets,  the  next  step  is  to  pay  a  bonus  to  the  head  of  each  shop 


484  BUSINESS  STATISTICS 

based  on  the  extent  to  which  he  adheres  to  the  schedule  as  laid 
out.  These  sheets  thus  do  for  the  foreman  what  the  Instruction 
Card  does  for  the  individual,  and  the  final  result  of  the  system 
is  harmonious  working  and  a  high  degree  of  efficiency,  a  portion 
of  the  profits  of  which  goes  directly  to  the  individual  in  propor- 
tion as  his  efforts  tend  to  maintain  that  efficiency.  Carried  out 
to  its  logical  end,  therefore,  the  Bonus  System  as  described  in 
my  previous  paper  becomes  practically  one  of  profit  sharing,  in 
which  each  man  gets  his  portion  of  the  profits  as  soon  as  he 
earns  it. 

In  this  paper  I  have  confined  myself  as  nearly  as  possible  to 
general  principles,  using  specific  cases  simply  as  illustrations. 
These  principles  are  capable  of  further  development  and  may 
be  worked  out  in  detail  to  suit  the  needs  of  many  forms  of  manu- 
facture. 

X.  Use  or  Production  Charts  in  a  Machine  Shop^ 

By  E.  H.  Schell 

The  slogan  of  the  machine  shop  of  today  is:  "  Production.'^ 
Overhead  charges  are  increasing;  greater  competition  is  lowering 
the  margin  of  profits;  and  promptness  in  the  filling  of  contracts 
is  becoming  more  necessary.  Present-day  difficulties  must  be 
foreseen  and  not  experienced,  and  should  delays  be  encountered, 
their  presence  must  be  immediately  explained,  and  the  causes 
remedied.  The  most  successful  executives  in  the  metal-working 
trades  are  demanding  organizations  which  will  place  the  details 
of  their  business,  in  clear  and  concise  form,  at  their  finger  tips,  so 
that  they  may  be  spared  the  work  of  investigation  and  occupy 
themselves  more  efficiently  in  authorizing  improvements  and 
creating  higher  economies. 

To  meet  these  requirements  there  have  been  developed  the 
so-called  production  charts.  These  are  veritable  work  pictures, 
and  show  at  a  glance  the  machines  which  are  delaying  factors  in 
the  manufacture  of  the  piece  under  investigation.  They  also 
indicate  the  causes  of  soldiering  and  enforced  idleness,  and  point 

^  American  Machinist,  August  21,  1913,  pp.  307-309.  Reprinted  by  permis- 
sion of  American  Machinist.   Illustrations  of  charts  are  omitted. 


FACTORY  STATISTICS  485 

to  the  reason  for  hitherto  unexplainable  congestions  of  work  in 
the  shop. 

Thus  the  foreman  is  relieved  of  vexing  conditions  which  are, 
perhaps,  beyond  his  control,  and  it  is  possible  for  the  superin- 
tendent or  factory  manager  to  place  unerringly  the  responsibility 
for  the  delays  or  high  cost  of  production.  The  data  necessary  for 
the  formation  of  these  charts  are  easily  obtainable,  consisting  of 
a  list  of  the  operations  in  sequence  of  the  piece  under  investiga- 
tion with  the  corresponding  daily  or  hourly  output  of  each 
machine  engaged  in  the  production.  The  machine  output  is 
then  plotted  [on  cross-section  paper]  against  the  operations  in 
sequence  and  the  points  connected. 

It  is  evident  that  this  graph  [omitted]  does  not  represent  ideal 
conditions,  for  the  hourly  machine  production  grows  gradually 
less  as  the  work  passes  to  its  finished  stage.  To  obtain  the  high- 
est degree  of  efficiency,  each  machine  should  produce  at  an  equal 
rate,  and  the  fine  would  be  a  straight  one  across  the  chart, 
parallel  to  the  base  line.  Such  a  condition  is  met  with  in  paper 
and  cotton  mills  where  the  kind  and  quantity  of  the  product  to 
be  manufactured  is  a  known  and  constant  quantity  for  which 
special  machinery  may  be  designed  and  installed. 

In  the  machine  shop,  with  its  constantly  varying  product,  we 
can  only  approximate  this  condition  as  closely  as  possible. 
Nevertheless,  there  is  a  certain  advantage  in  the  curve  shown,  in 
that  this  proportioning  of  machine  capacities  tends  to  develop 
small  reserves  of  partially  finished  parts  at  various  stages,  as 
indicated  by  the  cross-hatched  portions.  In  this  way,  should 
one  unit  of  production  become  disabled,  the  reserve  following 
it  could  be  drawn  on  and  the  output  of  finished  parts  continue. 

Let  us  assume,  however,  that  it  is  possible  to  reverse  the  order 
of  operations  during  the  advance  of  the  work  and  that  the 
machines  increase  instead  of  decrease  in  capacity.  This  is 
perhaps  the  most  unfortunate  condition  that  we  find  in  the 
study  of  production  charts.  Here  each  machine  has  a  slightly 
lower  operating  time  than  the  one  before  it,  but  the  difference 
is  not  sufficient  to  make  it  advisable  to  leave  the  line  of  opera- 
tion and  engage  temporarily  in  other  work. 


486  BUSINESS  STATISTICS 

This  condition  becomes  more  aggravated  as  the  piece  nears 
completion,  the  enforced  idleness  here  being  additive  as  indicated 
by  a  cross-hatched  portion.  The  employees  will  tend  to  con- 
ceal this  enforced  idleness  by  soldiering  of  various  sorts,  realiz- 
ing the  uselessness  of  "  breaking  up  "  and  working  temporarily 
on  other  work.  How  many  foremen  have  been  puzzled  by  this 
steady  refusal  to  hasten  production  on  the  part  of  the  operator, 
and  have  had  to  endure  the  blame  for  delays  which  they  could 
not  seem  to  rectify  ? 

A  specific  example  may  make  this  point  clearer.  Supposing 
the  machines  to  be  adjacent  to  one  another  so  that  the  work  is 
passed  along  in  lots  of  four  or  five.  Assume  that  looo  levers  are 
to  be  operated  upon.  The  first  operation  is  completed  in  ap- 
proximately 31  hours,  the  second  in  32,  the  third  in  33K  and 
so  on  until  the  parts  are  completed,  with  a  sum  total  of  about 
315  hours.  It  is  evident  that  as  each  machine  completes  its 
operation  it  is  at  liberty  to  be  readjusted  and  engaged  in  other 
work. 

Let  us  now  consider  the  operations  in  reverse  order.  Here, 
each  machine  must  work  at  the  rate  imposed  by  the  first  in  line, 
for  this  is  the  weakest  link  in  the  chain  of  operations,  requiring 
40  hours  to  complete  the  task.  Consequently,  a  total  of  360 
hours  is  spent  in  operating  upon  the  levers,  showing  a  loss  in 
time  of  46^^  hours  over  the  other  sequence,  although  the  machines 
used  are  identical. 

This  illustration  may  appear  much  exaggerated,  but  it  should 
be  remembered  that  the  operators  engaged  in  work  of  this  type 
are  not  usually  side  by  side,  and  the  consignment  of  parts  is 
divided  into  lots  of  50  or  75  to  minimize  trucking,  with  the  result 
that,  while  the  trouble  is  just  as  influential  as  before,  its  presence 
is  not  nearly  so  obvious  to  the  worried  foreman  who  has  other 
details  on  his  mind. 

It  is  evident,  therefore,  that  in  the  assignment  of  operations  to 
any  given  part,  it  is  imperative  that,  should  the  productive  capac- 
ity of  the  machines  fluctuate  at  all,  the  variation  should  be  in  a 
decreasing  scale  as  the  operations  proceed.  This  rule  applies 
only  to  parts  in  which  there  are  no  abrupt  changes  in  the  capacity 


FACTORY  STATISTICS  487 

of  the  machines.  For  example,  when  it  is  found  necessary  to  pass 
from  one  unit  of  very  high  daily  output  to  one  of  low  production, 
temporary  storage  may  be  made  use  of  and  the  high-duty 
machine  allowed  to  complete  a  continuous  run,  the  next  operator 
drawing  upon  the  stored  reserve. 

If  the  situation  is  reversed,  and  very  low  production  precedes  a 
possible  high  daily  output,  the  high-duty  machine  may  be 
utilized  profitably  for  other  purposes  over  a  certain  interval,  and 
operate  upon  the  work  at  hand  after  a  sufficient  quantity  of  it  has 
accmnulated.  The  following  illustration  will  perhaps  best  show 
the  great  effect  which  individual  conditions  and  circumstances 
have  upon  the  development  of  an  efficient  production  chart. 

Attention  was  recently  called  to  a  certain  machine  shop  whose 
floors  were  crowded  with  a  certain  cylinder  casting  in  various 
stages  of  completion.  While  investigating  the  cause,  a  production 
chart  was  made.  The  number  of  cyHnders  in  reserve  between 
each  operation  was  next  obtained  and  indicated  by  a  dotted 
line.  The  startling  way  in  which  this  line  lagged  behind  the 
production  curve  showed  at  once  that  the  great  inequalities  in 
the  machine  capacities,  as  well  as  the  arrangement  of  the  opera- 
tions were,  in  large  measure,  responsible  for  the  congestion. 

As  is  the  case  in  all  revisions  of  production  charts,  the  possi- 
bility of  altering  the  sequence  of  operations  was  first  considered 
with  the  aim  of  developing,  as  nearly  as  possible,  a  series  of  level 
or  down- sloping  portions  connected  by  steeper  slopes. 

The  dotted  line  beneath  the  peak  of  the  third  operation  indi- 
cates that  the  multiple  drill  which  is  here  employed  may  be 
operated  only  enough  each  day  to  complete  the  daily  product 
required  by  the  next  machine.  Between  the  fifth  and  sixth  and 
the  seventh  and  eighth  operations,  storage  space  was  suggested, 
thus  allowing  the  highly  productive  factors  to  complete  the  lot  at 
once  and  become  otherwise  available.  The  last  two  operators 
having  large  daily  output,"  the  variation  is  sufficient  to  allow  them 
to  spend  a  portion  of  each  day  upon  other  work. 

A  study  of  the  various  jigs,  fixtures,  machine  tools  and  methods 
of  operation  indicated  that  a  [desired]  production  line  was  not 
unattainable,  and  in  this  way  the  entire  problem  was  analyzed 


488  BUSINESS  STATISTICS 

and  placed  in  clear,  understandable  form,  the  difficulties  made 
evident,  the  delays  and  congestions  explained,  and  the  remedies 
suggested. 

Only  a  few  of  the  possibilities  which  these  charts  exhibit,  and 
the  uses  to  which  they  may  be  put  in  developing  and  formulating 
new  and  more  economical  methods  of  manufacturing,  have  been 
touched  upon.  Their  great  value  in  the  visualizing  of  machine- 
shop  production  leads  to  the  belief  that  their  development  and 
use  will  constitute  a  well-defined  departmental  activity  in  the 
manufacturing  organizations  of  the  future. 

XI.  Aids  to  Scientific  Foundry  Management  ^ 

By  W.  M.  Corse 

One  of  the  first  steps  in  the  scientific  management  of  a  plant  is 
to  plan  a  proper  organization.  This  gives  everyone  a  base  on 
which  to  start  and  clarifies  the  atmosphere  of  petty  jealousies 
and  misunderstandings.  With  this  organization  chart  before  us 
we  can  follow  out  the  various  departments  and  finally  perfect  a 
harmonious  working  people. 

My  own  plan  is  to  start  a  system  of  factory  records  in  order 
that  the  management  may  have  written  information  of  the  hap- 
penings in  the  shop  at  the  present  time  and  a  record  for  the  future. 
These  may  be  daily,  weekly  or  monthly  reports  and  should  serve 
to  furnish  information  that  will  give  a  mental  picture  of  affairs  in 
a  concise  manner.  These  records  should  be  immediate,  adequate 
and  permanent. 

I  shall  attempt  to  describe  some  of  the  records  I  have  used  with 
success  in  a  brass  factory.  I  do  not  say  that  these  are  all  that  are 
needed,  or  that  better  cannot  be  found  for  special  cases,  but 
simply  that  those  mentioned  will  aid  the  manager  to  see  more 
clearly  the  conditions  with  which  he  has  to  contend  daily. 

The  first  and  most  difficult  report  t9  keep  accurately  is  that  of 
the  metal  melted  and  of  the  output.  We  may  call  it  the  metal 
report  or  practice  sheet.  To  secure  positive  results  it  is  wise  to 
have  a  separate  room  in  which  to  store  the  daily  supply  of  metal 

1  Iron  Age,  March  13,  1913,  pp.  688-689.  Reprinted  by  permission  of  author 
and  of  Iron  Age,    Illustrations  of  forms  are  omitted. 


FACTORY  STATISTICS  489 

for  the  various  mixtures  and  the  shop  scrap  from  each  alloy  pro- 
duced. These  should  be  kept  in  separate  bins  or  boxes,  properly 
marked  with  the  alloy  number,  so  that  errors  in  weighing  can  be 
minimized.  As  many  alloys  look  similar  in  outward  appearance, 
great  care  should  be  exercised  first  in  taking  the  castings  from  the 
foundry  to  the  cleaning  room  and  next  in  taking  the  gates  and 
risers  and  defective  castings  from  the  cleaning  room  and  inspec- 
tion departments.  In  this  case,  as  in  all  movements  of  goods  in 
process,  the  arrangement  of  the  various  departments  should  be 
such  that  the  metal  moves  in  a  direction  that  does  not  cross  or 
back-track  other  material.  The  tagging  of  alloys  that  cannot  be 
readily  picked  out  by  their  appearance  will  aid  materially  in 
keeping  this  record  accurate.  The  progressive  jobbing  foundry 
will  frequently  have  twenty-five  standard  alloys,  as  well  as  a 
large  number  of  special  mixtures. 

Let  us  follow  the  process  of  the  metal  and  note  the  steps  in  that 
process.  First,  the  storekeeper  weighs  out  the  bulk  metals  to  the 
foundry  metal  room,  receiving  in  return  a  signed  requisition  from 
the  weighmaster.  This  requisition  serves  as  a  check  on  the  store 
records  and  aids  the  purchasing  department  in  balancing  the 
materials  account  with  the  accounting  department  at  the  end  of 
the  month.  Second,  the  weighmaster  weighs  out  the  various 
amounts  of  new  metals  and  shop  scrap  for  the  mixtures  ordered 
by  the  furnace  department,  using  the  daily  working  formulae 
given  to  him  by  the  metallurgist  in  charge  of  the  laboratory. 
Before  delivering  the  mixtures  to  the  furnace  department,  the 
weighmaster  should  record,  on  a  special  ruled  sheet,  the  alloy 
number,  furnace  number  and  the  weights  of  the  constituent 
metals.  At  the  end  of  the  day  this  sheet  goes  to  the  metallurgist 
to  be  checked  and  from  there  to  the  cost  office  for  compilation. 
The  totals  of  these  daily  sheets  for  a  week  give  the  amount  of  each 
alloy  charged  to  the  furnace  department  and  when  credited  with 
the  amount  remaining  at  the  end  of  the  week  show  the  metal 
melted  for  that  period.  They  show  not  only  the  amount  of  the 
various  constituents  used  in  each  alloy,  but  also  the  total  of  each 
metal  used  for  the  week.  They  further  show  exactly  what  each 
furnace  is  producing. 


490  BUSINESS  STATISTICS 

This  information  can  be  used  for  determining  the  consumption 
of  metal  and  gives  the  purchasing  department  an  accurate  figure 
on  which  to  base  future  purchases  for  the  maintenance  of  sufl&cient 
stock  for  the  orders  on  hand.  It  would  hardly  seem  necessary  to 
draw  attention  to  this  record,  but  I  have  often  been  surprised  to 
find  that  no  such  information  is  available  in  many  large  foundries. 

We  now  have  figures  on  our  weekly  summary  sheet  which  may 
be  said  to  constitute  the  debit  side  of  the  account.  The  credit 
side  of  the  account  consists  of  the  output  of  the  foundry  divided 
into  ingot  metal,  good  castings,  bad  castings,  gates,  risers  and 
recovered  metal.  They  are  weighed  by  the  inspection  depart- 
ment, the  first  three  coming  from  the  inspection  department 
itself,  the  fourth  from  the  cleaning  room  and  the  fifth  from  the 
recovery  department.  They  are  separated  first  by  day^s  work, 
then  by  alloys.  Subtracting  the  output  of  each  alloy  from  the 
metal  charged  to  the  furnace  department  will  give  the  gross  loss 
of  each  mixture  and  the  difference  of  the  totals  the  gross  loss  of 
the  foundry  for  the  work. 

The  net  loss  is  figured  at  the  end  of  any  period  by  assaying 
recovered  metal  too  fine  to  be  returned  direct  to  the  foundry, 
from  the  metal  recovery  department,  figuring  the  weight  of  metal 
recovered  and  subtracting  it  from  the  gross  loss.  For  cost  pur- 
poses the  net  loss  by  weight  cannot  be  used  because  the  recovered 
metal  cannot  be  sold  for  its  full  value  to  the  smelter.  We  there- 
fore estimate  the  value  of  the  metal  melted  for  the  period  in 
question,  divide  it  into  the  amount  received  from  the  smelter  for 
the  recovered  metal,  thus  arriving  at  the  percentage  of  the 
recovered  metal.  This  is  subtracted  from  the  gross  percentage 
loss  to  be  added  to  the  formula  cost  of  the  alloy.  This  is  not 
strictly  accurate  in  that  the  gross  percentage  loss  by  weight  may 
not  represent  the  formula  cost  of  the  new  metal,  but  as  the  more 
volatile  metals  are  usually  the  cheaper,  the  error  is  on  the  safe 
side. 

Let  us  take  an  example :  The  new  metal  may  consist  of  85  parts 
of  copper,  5  parts  tin,  5  parts  lead  and  5  parts  zinc.  This  would 
cost  on  the  basis  of  50-cent  tin,  4i-cent  lead,  15-cent  copper  and 
7-cent  zinc,  about  15.82  cents  a  pound.    If  we  are  making  ingot 


FACTORY  STATISTICS  49 1 

metal,  we  would  add  the  approximate  net  loss  of  3  per  cent, 
determined  as  outlined  above,  or  0.47  cents  to  15.82  cents,  giving 
us  16.29  cents  as  the  cost  of  the  metals  constituting  the  alloy. 

The  fact  that  such  a  figure  does  not  give  the  cost  of  the  alloy 
in  the  castings  is  frequently  overlooked  in  cost  accounting.  Let 
us  see  why  these  figures  cannot  be  used  in  estimating  cost  of 
castings.  If  we  melt  100  pounds  of  metal  we  may  assume  in  ordi- 
nary brass  foundry  practice  that  we  will  net  about  45  pounds  of 
good  castings.  It  is  apparent  that  100  pounds  of  metal  costs  in 
the  formula  15.82  cents  per  pound  and  that  we  lose  3  pounds 
valued  at  0.47  cent.  Therefore,  45  pounds  of  good  castings 
would  cost  45  X  15.82  cents  or  $7.13.  Figuring  the  loss  on  the 
value  of  the  good  castings  we  get  0.47  -7-  7.13  or  6.6  per  cent. 
The  metal  in  the  castings,  therefore,  costs  15.82  +  (6.6  per  cent 
of  15.82)  or  15.82  +  1.04  =  16.86  cents  per  pound. 

An  easy  way  to  determine  the  amount  to  be  added  for  loss  is  to 
divide  100  by  the  percentage  of  good  castings  produced,  in  this 
case  45  per  cent,  giving  a  factor  of  2.2.  Multiplying  the  net  loss  of 
3  per  cent  by  the  factor  2.2  we  get  6.6  per  cent,  which  is  the  same 
as  we  determined  by  the  other  method.  We  now  have  found,  by 
the  use  of  the  metal  report  or  metal  practice  sheet,  a  means  of 
checking  the  store  records,  the  amount  of  metal  melted,  the 
output  and  the  factors  to  be  used  in  figuring  the  value  of  the 
metal  for  cost  purposes. 

You  will  agree  that  these  are  all  essential  figures  and  also  that 
we  have  determined  one  of  the  three  elements  of  any  cost,  namely, 
material.  The  other  two  elements,  labor  and  expenses,  are 
determined  by  any  of  the  accepted  methods  of  cost  accounting. 

The  second  record  of  importance  is  the  daily  casting  report. 
The  first  essential  for  this  report  is  to  have  every  day's  work  kept 
absolutely  separate  in  all  departments  handling  the  castings, 
except  the  shipping  room.  There  are  many  advantages  in  keeping 
the  day's  work  separate,  which  pay  for  the  extra  labor  involved. 
As  soon  as  the  castings  are  shaken  out,  they  are  checked  for 
count  and  customer's  name  by  the  foundry  clerk  and  sent  to  the 
cleaning  room.  This  record  is  made  in  duplicate  in  the  left-hand 
columns  of  the  report  and  a  copy  goes  to  the  production  clerk, 


492  BUSINESS  STATISTICS 

who  records  the  number  of  the  pieces  made  on  the  shop  order, 
which  is  a  copy  of  the  customer's  original  order.  This  in  turn 
enables  the  production  department  to  keep  in  close  touch  with 
the  orders  in  process. 

As  the  castings  come  from  the  cleaning  room,  they  are  examined 
in  the  inspection  department  and  the  weight  and  count  of  good 
and  bad  pieces  noted.  The  good  castings  pass  directly  to  the 
shipping  department;  while  the  defective  pieces  are  sorted  by 
pattern  number  and  by  molders'  numbers,  on  a  bench  set  apart 
for  that  purpose.  When  the  day's  work  is  all  inspected,  the 
foundry  superintendent  and  factory  engineer  go  over  each  lot  of 
defectives  and  note  the  causes  of  defect.  This  serves  to  furnish 
information  for  the  immediate  correction  of  excessive  losses.  We 
all  know  that  one  of  the  big  leaks  in  any  foundry  is  the  amount 
of  bad  castings,  so  that  the  relatively  small  amount  of  time  spent 
in  their  examination  will  surely  lead  to  large  savings.  It  is  sur- 
prising how  frequently  this  examination  is  casual,  instead  of 
systematic,  and  it  generally  needs  a  cost  record  to  emphasize  the 
amount  of  the  loss  through  defective  castings  before  much  atten- 
tion is  paid  to  this  feature.  A  bonus  paid  to  the  foremen,  when 
the  percentage  of  defectives  drops  below  a  stated  amount,  will 
often  stimulate  interest  in  this  matter. 

The  inspection  department  records  the  number  and  weight  of 
the  good  and  bad  pieces  opposite  the  count  noted  by  the  foundry 
clerk  on  the  daily  casting  report  and  the  percentage  of  defectives, 
by  pieces,  is  calculated.  This  report  is  arranged  by  molders' 
numbers  so  that  it  will  show  the  foundry  superintendent  and 
factory  engineer  the  quality  of  work  being  turned  out  by  each 
molder.  A  compilation  of  the  daily  reports  for  the  week  will 
show  the  percentage  of  loss  by  each  molder,  and  the  weight  of 
castings  produced.  The  latter  when  divided  by  the  number  of 
working  hours  will  show  the  number  of  pounds  produced  per 
molder  per  day  for  the  week.  This  serves  as  an  excellent  check 
on  each  molder's  efficiency. 

Another  compilation  will  show  the  total  castings  produced  per 
alloy  by  weight  and  pieces  and  also  the  total  weight  and  pieces 
for  the  week.   This  is  the  source  of  part  of  the  information  regard- 


FACTORY  STATISTICS  493 

ing  output  which  was  mentioned  under  the  metal  report  in  the 
first  part  of  the  paper.  From  the  total  weight  and  pieces  is 
figured  the  average  weight  of  the  castings  produced  and  the  total 
defective  loss  in  percentage  by  weight  and  pieces.  This  gives  a 
good  general  idea  of  the  efiiciency  of  the  foundry  department 
when  taken  in  connection  with  average  number  of  pounds 
produced  per  molder  per  day. 

You  will  see  that  a  careful  study  of  the  reports  as  described  will 
give  a  good  general  view  of  the  conditions  in  the  foundry.  If  one 
wishes,  the  results  may  be  plotted  on  a  graphic  chart  which  will 
show  these  conditions  at  a  glance  more  effectively  than  a  report 
consisting  of  the  figures  only. 

When  a  job  is  of  sufficient  length  to  make  it  advisable  the 
record  of  the  defectives  may  be  kept  on  cards  arranged  by  pattern 
numbers.  The  average  of  a  period  points  out  the  excessive  defects 
and  indicates  the  patterns  to  be  improved  immediately,  in  order  to 
gain  maximum  benefits. 

The  third  set  of  records  that  I  might  mention  are  the  individual 
cards  showing  the  exact  time  spent  on  each  job.  On  these  cards 
are  entered  the  weight  and  count  taken  from  the  daily  casting 
reports,  thus  giving  a  complete  record  of  the  job  to  be  used  as  a 
basis  for  figuring  its  cost.  The  various  items  of  expense  charge- 
able to  each  job  are  taken  from  the  expense  analysis  of  the  month 
preceding.  This  expense  analysis  is  made  up  from  the  payroll, 
which  has  been  subdivided  by  job  or  standing  plant  order  num- 
bers, and  the  various  items  of  expense  are  taken  from  the  store- 
room requisitions  and  the  voucher  register  in  the  accounting 
department. 

To  summarize,  we  have  the  sources  of  information  for  the  three 
items  of  cost,  viz.,  material,  labor  and  expense. 

1.  The  metal  report  which  gives  the  cost  of  material. 

2.  The  individual  cost  cards  which  give  the  labor  on  each 
job. 

3.  The  expense  analysis  which  gives  the  items  of  expense 
chargeable  to  each  hour  of  productive  labor  on  each  pound  of 
castings  produced,  depending  on  which  method  is  followed  in 
figuring  the  expense  in  the  department  in  question. 


494  BUSINESS  STATISTICS 

In  order  to  manage  any  business  scientifically  the  basic  facts 
which  underlie  it  must  be  known.  As  a  step  in  this  direction,  the 
reports  mentioned  above  will  serve  to  give  fairly  complete 
information.  Many  others  can  be  added  to  give  specific  informa- 
tion, such  as  figuring  piecework  rates  and  standard  time  and 
bonus  rates,  but  these  should,  in  my  opinion,  follow  those  first 
mentioned. 

I  have  tried  to  outline  the  use  to  be  made  of  a  few  principal 
reports  with  a  view  of  stimulating  interest  in  securing  accurate 
information.  It  is  only  by  this  means,  I  believe,  that  the  so-called 
scientific  management  can  be  introduced  in  a  foundry.  After  a 
year  or  two  the  more  complex  methods  of  pay  and  performance 
can  be  added,  but  I  think  the  mistake  may  be  made  of  trying  to 
introduce  too  much  at  first,  thus  causing  confusion  and  distrust 
on  the  part  of  all  who  should  reap  the  most  benefit  from  a  per- 
fected system  of  cost  and  efficiency. 

XII.  Manufacturing  Expense  ^ 

By  Nicholas  T.  Ficker 

A  SHOP  cost  is  made  up  of  three  component  parts:  labor, 
material,  and  manufacturing  expense.  The  most  important  of 
these  is  manufacturing  expense.  It  derives  its  importance  not 
alone  from  its  magnitude  as  a  component  part  but  also  through 
what  might  justly  be  called  its  elusiveness.  Labor  and  material 
are  quantities  which  are  easily  determined,  but  the  correct  dis- 
tribution and  apportionment  of  manufacturing  expense  so  that 
each  job  passing  through  the  factory  may  bear  its  true  share  is 
a  matter  requiring  the  most  careful  analysis  and  study.  When 
we  stop  to  consider  that,  in  a  large  percentage  of  the  two  hundred 
and  fifty  thousand  or  more  factories  in  the  United  States,  this 
manufacturing  expense  amounts  to  more  than  the  combined 
total  of  the  productive  labor  and  material  used,  an  idea  of  its 
importance  will  be  readily  comprehended. 

1  Engineering  Magazine,  June,  1915,  pp.  321-326;  July,  1915,  pp.  553-559- 
Reprinted  by  permission  of  Engineering  Magazine. 


FACTORY  STATISTICS  495 

Probably  the  most  common  practice  of  distributing  manu- 
facturing expense  is  that  of  taking  the  total  of  this  expense  for 
the  previous  year  and  determining  what  percentage  this  total 
bears  to  the  productive  labor  for  that  period,  and  then  applying 
this  percentage  to  each  job  on  the  basis  of  the  productive  labor 
which  has  been  charged  directly  to  these  jobs.  Except  in  rare 
instances,  where  the  monthly  output  is  practically  uniform  and 
where  the  article  made  consists  of  only  one  item  of  merchandise, 
this  method  of  applying  manufacturing  expense  is  of  no  value 
whatever.  Even  in  such  a  case  as  has  just  been  cited  it  would  not 
be  correct  to  distribute  the  expense  on  the  basis  of  productive 
labor,  where  this  productive  labor  consists  of  both  daywork  and 
piecework  labor. 

Let  us  take  for  example  a  factory  employing  one  hundred 
people  in  five  manufacturing  departments,  and  assume  that  the 
class  of  merchandise  manufactured  is  brass  fittings  of  which  there 
are  two  dozen  different  articles.  In  looking  over  his  books  for  the 
preceding  year  the  manufacturer  finds  that  his  productive  labor 
amounted  to  $100,000  and  his  manufacturing  expense  to  $50,000. 
He  reasons,  therefore,  that  if  he  adds  fifty  cents  to  every  dollar 
of  productive  labor  applied  on  jobs  passing  through  his  factory 
during  the  ensuing  year,  he  will  have  a  fairly  accurate  idea  of 
what  it  costs  him  to  manufacture  each  job.  He  therefore  issues 
an  order  to  his  cost  department  to  compile  costs  for  the  ensuing 
year  on  that  basis,  and  then  feels  that  he  has  solved  the  whole 
problem  of  cost  finding  on  any  of  his  two  dozen  different  articles 
of  manufacture  and  has  established  a  correct  basis  for  estimating 
and  billing  purposes.  Let  us  now  see  how  near  he  is  to  his  real 
costs  of  production.  The  factory  is  divided  into  five  different 
departments  as  follows:  — 

Department  Number  of  Productive 

Employees  Labor 

Lathe 15  $9,000.00 

Milling 15  18,000.00 

Drilling 20  18,000.00 

Punch  Press 5  5,000.00 

Assembly 45  50,000.00 

Total 100  $100,000.00 


496  BUSINESS  STATISTICS 

A  detailed  analysis  of  manufacturing  expense/  consisting  of 
charges  for  administration,  power,  rent,  light,  tool  expense, 
depreciation,  insurance,  taxes,  sundry  and  material  expense, 
showed  that  the  manufacturing  expense  should  have  been 
divided  as  follows:  — 

Department  Manufacturing         Productive 

Expense  Labor 

Lathe $6,000.00  67% 

Milling 15,000.00  83 

Drilling 9,000.00  50 

Punch  Press 10,000.00  200 

Assembly 10,000.00               20 

Total $50,000.00  50% 

This  analysis  shows  a  wide  variation  between  the  relation  of  the 
manufacturing  expense  and  the  productive  labor  of  the  various 
departments.  The  Drilling  Department  alone  shows  a  percent- 
age on  which  it  would  be  safe  to  apply  the  50  per  cent  charge  for 


Department 

Productive 
Labor 

Manufactur- 
ing Expense 

Percentage 
of  Mfg.  Ex- 
pense to 
Productive 
Labor 

Departmen- 
tal Mfg.  Ex- 
pense based 
on  so  per 
cent  rate 

Error  of  Unit 

Costs  by  using 

one  general 

rate  for  all 

departments 

Lathe 

$9,000 
18,000 
18,000 
5,000 
50,000 

$6,000 
15,000 
9,000 
10,000 
10,000 

67% 
83 
SO 
200 
20 

$4,500 
9,000 
9,000 
2,500 

25,000 

-  $1,500 

"""    6  000 

Milling 

Drilling 

Punch  Press 

-    7,500 
+  15,000 

Assembly 

Total 

$100,000 

$50,000 

50% 

$50,000 

manufacturing  expense;  the  variations  in  the  other  four  depart- 
ments showing  a  discrepancy  of  from  20  to  150  per  cent. 

A  study  of  the  comparative  table  above  will  show  this  varia- 
tion very  clearly.  It  will  be  seen,  for  example,  that  the  actual 
manufacturing  expense  of  the  Punch  Press  Department  is  200 
per  cent  of  the  productive  labor;  therefore,  by  applying  the 
general  rate  of  50  per  cent,  which  the  manufacturer  decided 

*  Numerous  cost  accountants  include  interest  as  a  manufacturing  expense.  Be- 
cause of  the  great  differences  in  the  investment  in  different  machines,  a,s  well  as  for 
other  reasons,  the  editor  believes  that  interest  should  be  included.    [Editor.] 


FACTORY  STATISTICS  497 

at  the  beginning  of  the  year  to  apply  to  all  departments,  the  costs 
of  production  in  the  Punch  Press  Department  are  found  to  be 
$7,500  too  low.  In  like  manner  the  costs  of  the  Assembly  Depart- 
ment are  $15,000  too  high,  due  to  the  fact  that  the  manufacturing 
expense  in  this  department  is  actually  only  20  per  cent  of  the 
productive  labor. 

Percentages  cannot  be  averaged  when  they  are  based  on  dif- 
ferent units.  The  error  of  assuming  that  they  do  average  is  com- 
mitted constantly  by  even  some  of  the  largest  and  most  efficient 
manufacturers.  The  average  manufacturer,  after  a  presentation 
of  errors  similar  to  those  which  have  just  been  cited,  will  say, 
"  Very  true  —  but,  what  difference  does  it  make  even  if  my 
departmental  expense  charges  are  wrong,  so  long  as  they  average 
out  in  the  final  completed  cost  ?  "  This  would  be  a  poser  to  reply 
to  providing  his  assumption  were  correct.  His  whole  basis  of 
reasoning  however  is  wrong,  for  the  simple  reason  that  he  has 
failed  to  grasp  one  of  the  fundamental  laws  of  mathematics  and 
has  labored  under  the  delusion  that  a  minus  percentage  in  one 
department  would  be  offset  and  equalized  by  a  plus  percentage  in 
another  department.  The  road  to  bankruptcy  is  strewn  with  the 
wrecks  of  just  such  men  who  failed  to  appreciate  imtil  too  late 
this  very  simple  but  yet  most  important  principle.  A  concrete 
illustration  of  just  how  errors  of  this  kind  are  made  each  day 
would  probably  be  of  interest  at  this  point.  Let  us  asstmie  that 
a  certain  order  has  just  been  completed  after  passing  through  all 
of  the  departments  of  the  shop,  and  is  now  ready  to  be  figured. 

The  time  tickets  show  that  forty-two  hours  were  spent  on  this 
job.  For  simplicity  let  us  assume  a  uniform  rate  of  twenty  cents 
an  hour.  An  analysis  of  these  time  tickets  by  departments  will 
then  show  the  work  to  have  been  divided  up  as  follows:  — 

Department  Time  Rate  Labor  Cost 

Lathe 2  $0.20  $0.40 

Milling 4               "  0.80 

Drilling 6              "  1.20 

Punch  Press 10              "  2.cx3 

Assembly -. 20              "  4.00 

Total 42  **  $8.40 


498  BUSINESS  STATISTICS 

Adding  to  the  above  labor  the  standard  manufacturing 
expense  rate  of  50  per  cent  which  the  manufacturer  decided  was 
to  be  applied  to  all  jobs  irrespective  of  the  department,  and 
considering  the  material  cost  as  $1.00,  this  job  would  then  show  a 
total  cost  of  $13.60  made  up  as  follows:  — 

Labor '. $8.40 

Manufacturing  Expense 4.20 

Material i.oo 

Total $13.60 

We  have  found  by  analysis,  however,  that  each  of  the  depart- 
ments through  which  this  job  passed  in  the  process  of  manufac- 
ture had  a  different  rate  of  manufacturing  expense.  Taking  the 
actual  percentage  of  manufacturing  expense  for  each  department 
and  compiling  the  shop  cost  of  each  job  by  figuring  this  expense 
separately,  we  find  a  considerable  variation  existing  between  the 
cost  as  compiled  on  the  50  per  cent  basis  for  all  departments  and 
that  compiled  by  considering  the  work  of  each  department 
independently.    The  cost  figures  would  appear  as  follows:  — 

Department  Labor                  Mfg.  Expense 

Lathe $0.40  67 %    =    $0.27 

Milling 0.80  83        =      0.68 

Drilling 1.20             50       =      0.60 

Punch  Press 2.00  200       =     4.00 

Assembly 4.00             20       =      0.80 

Total $8.40  $6.35 

The  manufacturing  expense,  therefore,  which  should  have 
been  applied  against  the  labor  on  this  job  amounts  to  $6.35 
instead  of  $4.20,  making  an  error  of  $2.15.  This  shows  that 
the  manufacturing  expense  which  had  really  been  applied  was 
approximately  only  two-thirds  of  the  actual  figure.  The  corrected 
cost  would  show:  — 

Labor $8.40 

Manufacturing  Expense 6.35 

Material i.oo 

Total $15.75 


FACTORY  STATISTICS  499 

Assuming  that  the  manufactured  product  had  a  highly  com- 
petitive selling  field  and  that  the  percentage  of  profit  which  the 
manufacturer  could  add  to  his  cost  of  $13.60  was  limited  to  10 
per  cent,  then  the  actual  billing  price  of  $14.96,  as  based  on  his 
50  per  cent  manufacturing  expense,  would,  instead  of  netting 
him  a  profit  of  $1.36,  net  him  an  actual  loss  of  $0.79.  Or,  looking 
at  it  from  another  angle,  let  us  assume  that  this  article  had  a 
market  price  of  $15.50  and  that,  irrespective  of  the  cost  of  manu- 
facture, this  price  was  the  limit  his  customers  would  pay,  then  the 
manufacturer  would  still  imagine  that  he  was  making  a  profit 
of  $1.90  or  close  on  to  14  per  cent  on  his  investment  of  $13.60, 
when  in  reality  he  was  losing  $0.25  on  each  of  these  articles 
he  sold. 

The  question  which  the  student  of  this  subject  will  most 
naturally  ask  at  this  point  will  be,  "  What  if  he  does  lose  money 
on  this  article  as  long  as  he  is  making  enough  profit  on  some  of 
his  other  lines  to  more  than  make  up  for  this  loss  ?  "  He  may 
also  ask,  "  What  is  the  manufacturer  to  do,  if  he  is  forced  to 
make  an  article  or  line  on  which  he  is  losing  money,  in  order  to 
keep  all  of  his  lines  intact  ?  " 

A  farmer  who  raises  chickens  and  does  not  occasionally  take 
count  of  his  stock  will  not  discover  until  probably  too  late  that 
some  thieving  fox  has  been  pre3dng  on  those  chickens;  but  once 
let  him  know  that  such  a  condition  exists  and  he  will  lie  in  wait 
night  after  night  with  a  shotgun  until  the  cause  of  trouble  has 
been  removed.  This  is  analogous  to  the  manufacturer  in  the 
above  case;  as  long  as  he  is  not  aware  of  the  losses  which  are 
occurring  he  will  be  satisfied  to  a  certain  extent  and  will  not 
investigate,  but  once  let  him  know  that  it  is  actually  costing  him 
more  to  make  than  he  can  sell  for  and  the  fur  will  usually  start  to 
fly  very  quickly.  An  article  which  is  being  sold  at  less  than  his 
manufacturing  cost  usually  means  that  some  other  manu- 
facturer is  turning  out  this  article  at  a  much  lower  cost  than 
he  is.  This  means  investigating  methods,  locating  leaks,  and 
exercising  a  close  watch  and  supervision  over  this  line  until 
the  cause  of  trouble  has  been  remedied.  Very  often  it  may 
even  be  found  advantageous  to  discontinue  that  line,  but  the 


5CX)  BUSINESS  STATISTICS 

factor  of  paramount  importance  is  in  finding  where  the  trouble 
exists. 

There  is  also  another  phase  of  this  matter  which  is  worthy  of 
consideration  at  this  point.  The  very  fact  that  a  manufacturer 
is  losing  money  on  some  lines  and  is  still  able  to  show  a  substantial 
profit  at  the  close  of  each  year's  business  means  that  he  is  making 
an  abnormal  profit  on  one  or  more  of  his  other  lines.  By  substan- 
tially reducing  his  selling  prices  on  one  or  more  of  these  lines 
showing  such  an  abnormal  profit  it  may  be  possible  for  him  to 
monopolize  all  the  business  in  that  line,  his  increase  in  sales  more 
than  making  up  for  the  small  profit  per  unit  sold. 

Shop  costs  when  compiled  on  the  hit  and  miss  principle  of 
using  one  general  rate  for  manufacturing  expense,  applicable  to 
all  departments  and  classes  of  work,  are  therefore  of  very  little 
value  except  in  very  rare  cases,  such  as  that  cited  at  the  beginning 
of  this  chapter  where  the  output  is  of  the  mass  production  style  on 
a  single  type  of  merchandise. 

Manufacturing  expense  might  justly  be  termed  a  function  of 
time.  It  increases  in  a  ratio  which  is  practically  directly  pro- 
portional to  time.  Administration,  rent,  depreciation,  taxes, 
power,  and  other  charges  which  make  up  the  manufacturing 
expense,  with  the  possible  exception  of  that  part  known  as 
material  expense,  are  all  proportionate  thereto.  In  using  the 
productive  labor  as  a  basis  of  expense  distribution,  it  must  be 
thoroughly  understood  that  only  when  such  labor  is  used  as  a 
function  of  time  is  it  permissible  to  use  it  as  a  basis  for  distributing 
manufacturing  expense. 

Manufacturers  and  cost  accountants  very  often  make  the 
mistake  of  using  the  productive  labor  as  a  basis  when  a  large 
amount  of  this  labor  is  piecework.  Even  where  the  expenses  have 
been  segregated  by  departments,  the  introduction  of  piecework 
labor  will  change  the  entire  aspect  of  the  case.  Piecework  is  not 
a  function  of  time,  it  is  a  function  of  quantity;  and  as  manu- 
facturing expense,  when  not  split  up  into  two  divisions  (machine 
expense  and  material  expense)  and  applied  as  two  separate  items 
to  shop  costs,  cannot  be  distributed  correctly  on  any  basis  but 
that  of  time  or  functions  of  time,  piecework  labor  cannot  be 


FACTORY  STATISTICS  50I 

used  as  a  basis  for  distribution.  It  is  not  to  be  understood  from 
the  foregoing  that  even  where  the  material  expense  is  added  to 
shop  costs  as  a  separate  item  is  it  permissible  to  use  piecework 
labor  for  distributing  manufacturing  expense.  The  method  of 
applying  this  material  expense  will  be  taken  up  in  a  later 
paragraph  and  explained  in  detail. 

To  illustrate  more  fully  the  error  of  using  piecework  labor  as  a 
basis  of  expense  distribution,  let  us  take,  for  example,  a  depart- 
ment in  which  a  certain  manufacturing  expense  rate  has  been 
figured  on  the  basis  of  straight  daywork  labor.  At  a  punch- 
press  machine  in  this  department  a  man  is  getting  paid  at  the 
rate  of  twenty-five  cents  an  hour.  By  analysis  of  the  cost  of 
certain  punched  parts,  it  was  found  that  the  operator  punched  out 
these  parts  at  a  rate  of  2,500  an  hour  and  a  piecework  rate  of  one 
cent  a  hundred  was  set  for  all  work  on  this  piece  of  merchandise, 
this  being  equivalent  to  his  hourly  rate  of  twenty-five  cents.  Let 
us  further  assume  that  the  departmental  rate  of,  say  60  per  cent 
of  the  productive  labor,  fairly  accurately  represents  the  expense  of 
operating  this  punch  press.  This  would  mean  that  a  charge  of 
fifteen  cents  an  hour  (60  per  cent  of  twenty-five  cents)  would 
cover  the  cost  of  the  manufacturing  expense  which  this  machine 
must  bear  of  the  department's  total  charge.  Piecework  is  intro- 
duced at  this  point.  The  pressman,  spurred  on  by  the  incentive 
of  higher  wages,  speeds  up  his  production  to  such  an  extent  that 
instead  of  turning  out  2,500  pieces  an  hour  he  actually  increases 
this  to  4,000  pieces.  At  the  rate  of  one  cent  a  hundred,  his  pay, 
therefore,  amounts  to  forty  cents  an  hour  instead  of  the  twenty- 
five  cents  which  he  earned  on  an  hourly  basis.  In  course  of  due 
time  the  cost  clerk  who  figures  this  job  applies  his  60  per  cent  to 
the  forty  cent  labor  charge,  making  the  manufacturing  expense 
chargeable  against  this  job  twenty-four  cents.  But  if  this  press- 
man had  turned  out  4,000  pieces  an  hour  while  on  a  straight 
daywork  rate  of  twenty-five  cents  an  hour,  the  clerk  would  have 
added  only  fifteen  cents  for  manufacturing  expense  instead 
of  twenty-four  cents  under  the  piecework  arrangement;  this 
makes  a  difference  of  nine  cents  in  the  manufacturing  expense 
charge  or,  in  percentage,  a  variation  of  60  per  cent  over  the 
original  method  of  determining  this  expense. 


502  BUSINESS  STATISTICS 

The  only  way  to  determine  which  of  these  two  methods  is  cor- 
rect is  to  find  whether  or  not  these  charges  actually  did  increase 
60  per  cent  on  an  increased  production  due  to  the  piecework 
method.  Administration,  rent,  light,  depreciation,  insurance, 
taxes,  and  tool  charges  remain  the  same  regardless  of  the  value 
of  output;  all  that  remains  of  the  items  which  enter  into  the 
manufacturing  expense  are  power  and  material  expense,  and  the 
very  small  increase  in  either  or  both  of  these  items  would  be  so 
small  as  to  hardly  make  them  worthy  of  consideration.  Piece- 
work cannot,  therefore,  be  used  as  a  basis  for  manufacturing 
expense  distributing.  The  labor  must  be  reduced  to  functions 
of  time  or  else  be  figured  directly  on  the  basis  of  time.  In  order 
to  determine  correctly  the  manufacturing  expense  on  the  job 
above  referred  to  the  cost  clerk  must  know  the  time  it  has  taken 
the  pressman  to  stamp  out  the  4,000  pieces  and,  finding  this  to  be 
one  hour,  he  applies  his  standard  rate  of  manufacturing  expense 
for  that  department,  which  is  60  per  cent  of  the  productive  labor, 
to  the  twenty-five  cent  labor  charge  and  finds  the  charge  for 
manufacturing  expense  against  this  job  to  be  fifteen  cents. 

Manufacturers  commonly  commit  the  error  of  discontinuing 
time-keeping  on  jobs  after  piecework  rates  have  once  been 
established.  The  importance  of  timing  all  jobs  will  be  appre- 
ciated by  simply  keeping  in  mind  the  fact  that  the  unit  of  time 
must  be  used  as  a  basis  for  distributing  the  manufacturing 
expense.  In  some  of  the  larger  manufacturing  establishments 
where  the  piecework  labor  amounts  to  80  per  cent  or  more  of  the 
total  productive  labor,  the  time  spent  on  each  operation  is 
known  to  a  small  fraction  of  an  hour.  By  this  means  only  can 
a  reasonably  sure  basis  be  established  for  the  distribution  of 
manufacturing  expense. 

The  purpose  of  this  opening  chapter  has  been  to  impress  on  the 
mind  of  the  reader  the  necessity  for  segregating  all  of  this  expense 
by  manufacturing  departments,  to  establish  the  unit  of  time  as  a 
basis  for  such  distribution,  and  to  point  out  some  of  the  mistakes 
that  are  made  where  a  thorough  knowledge  of  the  subject  is 
lacking.  It  will  be  seen,  as  a  deeper  insight  into  manufacturing 
expense  distribution  is  gained,  that  a  much  finer  segregation  is 


FACTORY  STATISTICS  503 

possible  than  that  by  departments  which  has  been  used  as  a  basis 
of  discussion  in  this  chapter.  The  most  important  point  to  be 
comprehended  at  this  time  is  that  none  of  these  finer  distinc- 
tions are  possible  until  after  the  primary  stages  are  put  into 
operation. 

Many  accountants  make  the  mistake  of  thinking  they  can 
hurdle  these  primaiy  stages  and  start  right  in  on  a  segregation  of 
expense  by  machines  without  first  proving  their  distribution  by 
departments  as  herein  outlined.  Nothing  is  to  be  gained  by  such 
methods  of  procedure  as  they  invariably  result  in  disaster  to  the 
entire  scheme.  The  first  requirement  is  to  establish  to  a  satis- 
factory degree  of  certainty  a  basis  that  is  correct;  then  each 
successive  step  will  become  simply  a  matter  of  careful  analysis. 

The  Two  Main  Divisions:    Machine  Expense  and 
Material  Expense 

Before  going  into  a  detailed  analysis  of  the  various  elements 
comprising  manufacturing  expense,  it  is  of  paramount  importance 
that  a  thorough  understanding  be  had  of  just  what  is  included  by 
the  term. 

A  manufacturing  establishment  may  be  roughly  divided  up 
into  three  main  divisions  of  organizations:  (i)  the  manufacturing 
or  shop  organization;  (2)  the  sales  organization;  and  (3)  the 
general  organization.  The  sales  organization,  which  is  self- 
explanatory,  and  the  general  organization,  which  consists  of  the 
general  executive  officers  of  the  company  and  their  staffs,  may  be 
eliminated  from  this  discussion.  We  are  simply  concerned  with 
what  is  known  as  the  manufacturing  or  shop  organization  and  the 
expense  incidental  thereto.  Whenever  the  term  "  manufacturing 
expense  "  is  used  in  this  discussion  it  should  be  understood  to 
refer  only  to  the  shop  proper  and  not  to  any  other  organization 
of  the  company. 

Manufacturing  expense  may  be  defined  as  consisting  of  all 
charges  incurred  in  connection  with  manufacturing  which  are  not 
considered  as  productive  labor  or  raw  material.  It  is  made  up  of 
two  kinds  of  expense  —  machine  expense  and  material  expense. 
These  two  divisions  of  manufacturing  expense  require  distribution 


S04 


BUSINESS  STATISTICS 


to  jobs  according  to  different  methods.  Machine  expense,  for 
example,  is  distributable  on  the  basis  of  time  while  material 
expense  is  proportional  to  the  bulk  of  the  raw  material  used. 

In  classifying  expense  items,  however,  it  is  extremely  difficult, 
if  not  impossible,  to  charge  expenses  directly  against  either 
machine  expense  or  material  expense  with  any  degree  of  accuracy. 
This  can  be  illustrated  by  considering  the  expense  charge  for 
light,  which  forms  part  of  what  we  shall  later  denote  as  rent 
expense.  The  expense  of  lighting  the  material  stockrooms,  for 
instance,  would  be  classified  ''  material  expense,"  while  the 
expense  of  lighting  the  manufacturing  departments  would  be 
classified  "  machine  expense."  From  this  example  it  can  be  seen 
that  it  would  be  practically  impossible  for  the  clerk  who  does  the 
classifying  to  prorate  an  expense  charge  for  light  so  that  the  two 
main  divisions  of  manufacturing  expense  would  receive  their  just 
allotment.  Therefore,  in  order  to  simplify  the  work  of  classifica- 
tion, all  expense  items  are  first  charged  to  one  or  more  of  the 
classes  listed  below  and  then  closed  out  at  periodic  intervals  into 
either  machine  expense  or  material  expense  according  to  certain 
fixed  rules  which  will  be  discussed  later.  These  classes  of  expense 
are  as  follows :  — 


Administration  Expense 

Power  " 

Rent 

Tool  « 

Fixed  Charges:  — 

Depreciation       " 

Insurance  " 

Taxes  " 

Idle  Labor 
Unclassified  " 

Direct  charges  to  Material  Expense.^ 


Closed  out  into  Machine 
Expense  and  Material  Expense 


Whenever  charges  are  made  against  any  of  the  above  classes  a 
further  sub-classification  by  departments  and  kinds  of  expense 
should  be  made.  For  example,  a  charge  for  "  Repairs  to  a  Punch 
and  Die  "  would  be  classified  Tool  Expense,  Repairs  to  Tools, 
Punch  Press  Department.     Symbols  denoting  these  classifica- 


*  Includes  only  expense  pertaining  to  material. 


FACTORY  STATISTICS  505 

tions  are  used  to  save  time.  Thus,  the  foregoing  example  might 
be  classified  as  follows:  — 

25—032—525 

in  which  25  is  the  general  ledger  account  number  for  manufactur- 
ing expense;  032,  the  sub-classification  denoting  "  Repairs  to 
Tools,"  and  525,  the  number  of  the  department  incurring  the 
charge.  In  this  manner  a  large  part  of  the  manufacturing  expense 
can  be  readily  segregated  by  departments.  There  are,  however, 
some  expenses  which  cannot  be  charged  directly  to  specific  manu- 
facturing departments.  These  require  distribution  according  to 
certain  fixed  rules:  for  example,  administration  expense,  against 
which  the  salary  of  the  general  superintendent  is  chargeable, 
could  not  be  assessed  directly  against  any  one  department;  it  is, 
therefore,  simply  charged  in  blanket  form  to  administration 
expense  and  then  later  it  is  prorated  amongst  the  various  depart- 
ments on  the  basis  of  the  number  of  employees  in  each.  A  shop 
superintendent  does  not  superintend  floor  space  or  machines,  but 
he  does  superintend  the  personnel  of  each  department,  therefore 
his  salary  and  the  salaries  of  his  general  staff  are  chargeable  to  the 
various  manufacturing  departments  on  the  basis  of  the  normal 
employees  in  each  department.  On  the  other  hand,  rent  expense 
is  distributed  on  the  basis  of  floor  space  occupied  by  each  depart- 
ment; power  expense  on  the  basis  of  kilowatt-hours  consumed; 
and  fixed  charges  on  the  basis  of  face  values  of  equipment  in  each 
department. 

Non-productive  labor,  such  as  wages  of  sweepers,  material 
:porters,  freight  elevator  operators,  watchmen,  etc.,  requires 
classification  to  one  or  more  of  the  several  main  divisions  of 
expense  which  have  been  listed,  and  are  finally  absorbed  in  the 
departmental  expense  charges  through  the  distribution  of  these 
main  divisions  of  expense.  For  example,  the  wages  of  sweepers 
are  chargeable  to  rent  expense,  and  eventually  are  absorbed  by 
the  manufacturing  departments  through  the  rent  charge  which  is 
assessed  against  all  departments,  storerooms,  etc.,  on  the  basis 
of  the  number  of  square  feet  occupied  by  each.  This  charge  per 
square  foot  is  determined  by  simply  applying  the  total  of  all 
charges  included  in  rent  expense  against  the  total  manufacturing 


So6  BUSINESS  STATISTICS 

area  and  then  reducing  it  to  a  charge  per  square  foot.  In  like 
manner,  wages  of  firemen  are  chargeable  to  power  expense,  and 
are  distributed,  together  with  other  power  expense  items,  on  the 
basis  of  a  rate  per  kilowatt-hour  according  to  the  power  consump- 
tion of  the  various  departments  and  divisions  of  the  factory. 

It  is  not  the  intention  at  this  point  to  go  very  deeply  into  an 
analysis  of  all  the  sub-classifications  to  the  several  main  expense 
divisions,  which  will  be  discussed  more  fully  in  a  following  chapter, 
but  to  lay  particular  stress  upon  the  importance  of  correctly 
classifying  all  accounts  which  in  any  way  affect  the  distribution 
of  manufacturing  expense. 

In  the  opinion  of  the  writer  the  division  of  expense  that 
deserves  to  rank  as  most  important  is  that  classified  as  "  idle 
labor  expense."  For  some  reason  or  other,  however,  those  factors 
most  deserving  of  consideration  in  a  manufacturing  establishment 
are  the  ones  most  apt  to  be  neglected  by  the  management.  This 
statement  is  not  made  on  hearsay,  but  is  the  conclusion  forced 
upon  the  writer  by  association  with  conditions  as  they  actually 
exist  in  many  plants  throughout  the  country.  It  is  especially 
true  of  the  manner  in  which  control  is  exercised  over  the  labor 
actually  engaged  in  producing.  All  that  the  average  factory 
manager  seems  to  be  interested  in  is  in  knowing  that  his  employees 
are  at  their  benches  or  machines  when  the  whistle  blows  in  the 
morning,  that  they  stay  there  except  during  the  lunch  period  until 
the  whistle  blows  at  night,  and  that  some  sort  of  distribution  is 
made  of  the  time  consumed  on  the  different  jobs  during  this 
period.  How  much  time  has  been  wasted  during  the  course  of 
each  day  does  not  seem  to  be  of  particular  interest  to  him.  Ask 
the  average  manufacturer  how  much  time  his  men  waste  in  wait- 
ing for  new  jobs,  how  much  time  they  waste  waiting  for  tools, 
how  much  time  they  waste  reporting  to  time  clerks  at  the  start 
and  completion  of  each  job.  If  he  is  honest  he  will  tell  you  that 
he  doesn't  know.  He  may  also  tell  you  that  all  the  time  of  his 
productive  employees  is  distributed  on  jobs.  Surely,  there  is 
nothing  simpler  than  to  charge  every  minute  of  the  day  to  the 
^ve  or  ten  jobs  a  man  may  have  worked  on  during  that  time. 
However,  the  facts  remain. 


FACTORY  STATISTICS  507 

Let  us  take,  for  example,  a  factory  employing  a  hundred  work- 
men in  the  manufacturing  departments  at  an  average  wage  of 
twenty-five  cents  an  hour.  We  will  assume  that  the  factory  day 
is  nine  hours  long,  and  that  the  average  number  of  job  changes  is 
six  a  day.  At  the  start  and  finish  of  each  of  these  six  jobs  every 
employee  reports  to  a  timekeeper  who,  by  the  use  of  a  time  stamp, 
records  the  time  of  starting  and  finishing  each  job.  There  are 
two  time  clerks  in  the  shop  to  handle  the  time  of  a  hundred  men. 
They  are  as  centrally  located  as  possible,  but  by  timing  the  men, 
without  their  knowledge,  it  is  found  that  it  takes  a  man  an  aver- 
age of  two  minutes  going  and  two  minutes  coming  back  from  the 
timekeepers'  desk  at  the  start  and  completion  of  each  job  he 
works  on  during  the  day.  (This  figure  is  very  conservative  and 
can  be  substantiated  in  almost  any  factory  engaged  in  work 
requiring  successive  job  changes.)  We  find,  therefore,  a  loss  of 
four  minutes  for  each  job  or  twenty-four  minutes  a  day  for  each 
employee.  This  means  two  thousand  four  hundred  minutes  or 
forty  hours  a  day  for  the  entire  force;  at  twenty-five  cents  an 
hour  it  is  equivalent  to  $10.00  per  day;  for  a  year  of  three  hundred 
working  days  it  means  a  direct  loss  of  $3,000.  There  are  methods 
whereby  the  time  is  recorded  right  from  the  workmen's  benches 
or  machines  that  work  out  very  satisfactorily,  and  do  not  require 
the  men  to  leave  their  places  at  any  time.  This  will  answer  the 
question  of  how  job  records  are  to  be  kept  without  necessitating 
the  above  loss  of  time. 

Then,  in  addition  to  this  $3,000  waste,  there  is  the  time  con- 
sumed in  waiting  for  the  next  job  which,  through  faulty  planning, 
has  not  arrived  on  schedule.  These  "  waits  "  average  anywhere 
from  five  minutes  to  half  an  hour,  depending  on  how  much 
interest  the  management  shows  in  this  part  of  the  routine.  In 
any  event  a  loss  of  half  an  hour  a  day  for  each  man  would  be 
extremely  low  and  could  hardly  be  criticized  as  being  harsh  on  the 
management  in  view  of  present-day  conditions.  This  means 
another  loss  that  amounts  to  fifty  hours,  or  $12.50  a  day,  or 
$3,750  a  year.  A  total  loss  of  $6,750,  therefore,  exists  in  com- 
parison with  a  payroll  of  $67,500  for  the  year.  This  means  that, 
without  taking  any  other  than  these  two  causes  of  loss  into  con- 


508  BUSINESS  STATISTICS 

sideration,  there  is  a  charge  right  here  of  $6,750  to  manufacturing 
expense,  which  must  be  distributed  and  absorbed  by  the  output 
of  the  factory.  It  is,  nevertheless,  worthy  of  note  that  efficiency 
engineers,  cost  accountants,  and  managers  of  factories  usually 
neglect  to  take  this  factor  of  idle  time  into  consideration  from 
a  strictly  labor  cost  point  of  view.  Much  has  been  written 
dealing  with  methods  of  applying  the  undistributed  portion  of 
manufacturing  expense  to  costs  of  production  where  a  balance 
has  accumulated  due  to  a  decrease  in  shop  activity,  but  for 
some  unaccountable  reason  the  expense  incurred  in  the  form  of 
productive  labor  not  engaged  in  producing  has  been  disregarded. 

The  importance  of  knowing,  therefore,  what  the  machine 
activity  is  for  the  shop  as  a  whole  and  for  each  department  thereof 
becomes  even  more  apparent  when  the  fact  is  realized  that  the 
other  manufacturing  expense  items,  such  as  administration, 
power,  rent,  depreciation,  insurance  taxes,  etc.,  have  also  been 
undistributed  on  production  orders  during  the  period  measured 
by  the  "  idle  productive  labor  "  just  referred  to. 

A  machine  standing  idle  is  still  occupyii;ig  floor  space  (rent 
expense),  is  still  incurring  tax  and  insurance  charges,  is  still  piling 
up  power  charges  through  the  running  of  idlers,  countershafting, 
etc.,  is  still  depreciating  in  value  more  than  if  it  were  in  operation, 
and  the  administration  expense  is  still  being  charged  against  the 
operator  of  that  machine  whether  he  is  producing  or  not.  There- 
fore for  every  minute  that  is  charged  to  ''  idle  productive  labor  '' 
and  which  represents  a  loss  in  cold  cash  to  the  manufacturer,  a 
certain  additional  amount  for  the  manufacturing  expense  in- 
curred during  that  period  is  also  chargeable.  The  amount  in 
dollars  and  cents,  which  the  sum  of  these  two  sources  of  loss 
represents,  is  the  measure  of  the  loss  which  the  manufacturer  is 
really  forced  to  stand.  A  careful  consideration  of  the  facts  as 
presented  cannot  help  but  force  the  conclusion  that  "  idle  pro- 
ductive labor  "  is  a  very  important  factor  in  connection  with  the 
distribution  of  manufacturing  expense.  However,  once  its  im- 
portance is  realized,  it  is  a  comparatively  simple  matter  to  apply 
a  remedy.  Leaks  of  any  nature  in  a  manufacturing  estabKsh- 
ment  derive  their  importance  not  so  much  from  their  occurrence 


FACTORY  STATISTICS  509 

as  from  a  lack  of  knowledge  as  to  their  existence.  To  know  is  to 
remedy,  but  the  simplicity  of  the  remedy  has  no  bearing  on  the 
case  providing  the  need  of  its  application  remains  undiscovered. 

Much  has  been  written  dealing  with  the  routing  and  scheduling 
of  shop  orders,  and  with  stock-keeping  methods  in  general.  The 
purpose  here  is  not  to  discuss  this  phase  of  manufacturing  in 
any  way  except  to  point  out  that  a  proper  method  for  handling, 
routing,  and  scheduHng  production  orders  is  essential,  if  a  control 
over  this  important  factor  of  expense,  called  "  idle  productive 
labor,"  is  to  be  exercised. 

Another  important  division  of  manufacturing  expense  is  that 
classified  as  "  material  expense."  Material  expense  may  be  de- 
fined as  that  expense  incurred  in  purchasing,  receiving,  and 
handling  shop,  raw,  and  worked  materials.  It  includes  such 
expenses  as  depreciation,  insurance,  and  taxes  on  raw  and  worked 
materials,  salaries  of  raw  and  process  material  stockkeepers, 
counters,  inspectors  and  porters,  freight  elevator  operators  (in 
part),  etc.  In  shops  where  large  cranes  are  used,  it  also  includes 
the  salaries  of  crane-men. 

All  manufacturing  expense  which  is  not  chargeable  as  material 
expense  is  known  as  "  machine  expense."  Where  accurate 'costs 
are  required  material  expense  should  be  applied  to  shop  costs  as  a 
separate  item,  that  is,  it  should  not  be  included  with  the  machine 
expense  as  one  general  loading  but  considered  separately.  In 
such  cases  it  should  be  applied  as  an  individual  rate,  called 
material  expense,  on  the  basis  of  the  value  of  the  raw  material 
charged  against  an  order,  or  on  the  basis  of  the  bulk  (represented 
by  weight)  of  the  material  used.  The  construction  of  a  shop  cost 
made  up  in  this  manner  is  here  shown:  — 

Productive  Labor 

Machine  Expense)* 

Raw  Material  ^.^I^*  (Manufacturing  Expense) 

Material  Expense), 

Shop  Cost 

The  practice  of  subdividing  manufacturing  expense  into 
machine  expense  and  material  expense  respectively  has  for  its 
object  a  more  perfect  control  over  the  channels  through  which 


5IO  BUSINESS  STATISTICS 

this  expense  accumulates  than  is  possible  where  this  segregation  is 
not  made.  When  classifying  expense  charges,  it  necessitates  very 
little  extra  effort  to  classify  them  properly  by  subdivisions  of 
expense  instead  of  grouping  them  all  under  one  general  classifica- 
tion. By  this  method  it  is  a  comparatively  simple  matter  to 
segregate  the  manufacturing  expense  so  that  at  the  end  of  every 
month,  quarter,  or  year,  comparisons  can  be  made  to  deter- 
mine whether  the  machine  expense  or  the  material  expense  has 
increased  in  undue  proportion  to  the  shop  output. 

When  applying  material  expense  as  a  separate  item  in  making 
up  costs  of  manufacture,  care  should  be  used  in  establishing  a 
basis  of  distribution.  The  practice  of  applying  material  expense 
to  jobs,  by  using  the  cost  of  the  raw  material  used  on  each  job  as 
a  basis,  is  a  mistake  frequently  made  by  manufacturers  and  cost 
accountants.  Their  method  of  establishing  this  basis  is  to  take 
the  total  cost  of  the  raw  material  used  during  a  normal  year  and 
find  what  relation  this  cost  bears  to  the  material  expense  for  the 
same  period.  With  this  relation  established  in  the  form  of  a 
percentage  based  on  the  raw  material  cost,  they  proceed  to  apply 
it  to  all  shop  jobs  in  order  to  determine  the  proper  proportion  of 
material  expense  chargeable  thereto. 

There  is  only  one  correct  way  of  distributing  material  expense 
and  that  is  on  the  basis  of  bulk.  Practically  all  material  expense 
is  incurred  in  a  ratio  proportional  to  bulk.  By  using  the  term 
*'  bulk  "  it  is  to  be  understood  that  the  term  "  weight  "  can  be 
used  as  a  substitute,  because  it  is  a  more  standard  way  of 
measuring  material,  and  because  the  bulk  of  an  article  is  rather 
difficult  to  determine  accurately.  That  there  is  quite  a  dis- 
tinction between  using  the  cost  of  the  material  and  the  bulk 
(or  weight)  of  the  material  as  a  basis  for  material  expense 
distribution  will  be  readily  noted  from  the  following  analysis:  — 

It  is  a  comparatively  simple  matter  to  handle  and  store  $i,ooo 
worth  of  platinum;  it  requires,  however,  a  considerable  amount 
of  time  and  effort  to  handle  $25  worth  of  brass  castings.  More 
space  is  required  in  the  storeroom  for  wrought  iron  pipe  than  is 
required  for  copper  wire  of  equal  value.  Diamonds  or  precious 
stones  require  practically  no  handling  expense  as  compared  to  the 


FACTORY  STATISTICS  5 1 1 

cost  of  handling  lumber.  Freight  elevators  are  necessary  because 
of  the  bulk,  or  weight,  of  a  bale  of  cotton,  but  an  equal  value  in 
gold  could  be  carried  in  a  man's  pocket  without  effort.  The 
conclusion  to  be  drawn,  therefore,  is  that  material  expense  does 
not,  to  any  appreciable  extent,  vary  in  proportion  to  the  cost  of 
the  material  except  as  such  increase  or  decrease  in  cost  is  due  to 
a  greater  or  less  bulk  of  material  used.  There  are  instances  where 
the  consumption  of  materials  of  different  kinds  is  so  uniform 
year  in  and  year  out  as  to  permit  the  use  of  the  material  cost 
figures  as  a  basis  for  material  expense  distribution.  Such  cases 
do  not  warrant  the  segregation  of  material  expense  as  a  separate 
and  distinct  item  of  manufacturing  expense,  but  in  the  average 
factory  such  a  segregation  is  conducive  to  more  accurate  cost 
figures. 

The  possibility  of  error  is  so  great  where  the  cost  of  the  raw 
material  is  used  for  material  expense  distribution  as  to  warrant 
an  illustration  of  how  such  an  error  can  occur:  Let  us  take,  for 
instance,  a  factory  whose  manufacturing  expense  has  been 
divided  into  machine  expense  and  material  expense.  The  material 
expense  has  been  found  by  analysis  to  average  15  per  cent  of  the 
cost  of  the  raw  material  used  as  figured  on  the  basis  of  a  normal 
year.  By  analysis  of  past  figures  it  has  also  been  found  that  the 
machine  expense  of  a  certain  department  is  50  per  cent  of  the 
labor.  A  job  is  assigned  to  this  department  and  on  its  completion 
the  cost  clerk's  figures  would  appear  as  follows:  — 

Productive  Labor $3.00 

Machine  Expense,  at  50  per  cent 1.50 

Raw  Material 6.00 

Material  Expense,  at  15  per  cent 0.90 

Total  Cost $11.40 

An  inspection  of  the  order  shows  that  the  high  material  cost 
was  due  to  the  fact  that  platinum  was  used  in  the  manufacture 
of  what  happened  to  be  an  electrical  instrument  requiring 
platinum  contact  points,  etc.  If  the  material  used  had  been 
zinc  or  copper  the  material  cost  would  have  been  considerably 
less  than  ninety  cents;  yet  by  a  study  of  the  items  which  go  to 


512  BUSINESS  STATISTICS 

make  up  material  expense  we  found  that  it  cost  a  great  deal  less  to 
handle  platinum  than  it  did  to  handle  copper,  weight  by  weight; 
therefore,  something  must  be  wrong  with  this  method  of  applying 
material  expense  to  shop  orders. 

A  study  of  the  weight  of  the  raw  material,  as  found  in  the  books 
of  the  company  for  the  period  over  which  the  normal  material 
expense  was  figured,  showed  that  if  reduced  to  a  cost  per  pound 
basis  the  material  expense  would  be  fiye  cents  a  pound;  the 
charge  of  ninety  cents  should,  therefore,  have  represented 
material  weighing  eighteen  pounds.  The  platinum  used  amounted 
to  only  a  fraction  of  an  ounce;  hence,  the  charge  of  ninety  cents 
for  material  expense  is  actually  over  eighty-five  cents  too  high, 
making  a  corresponding  error  in  the  shop  cost  as  compiled  by  the 
clerk. 

The  foregoing  example  demonstrates  very  clearly  that  the  cost 
of  raw  material  cannot  be  used  as  a  correct  basis  for  distributing 
the  material  expense  portion  of  manufacturing  expense.  It  does 
not  necessarily  follow,  however,  that  it  is  always  advisable  to 
figure  this  expense  by  a  system  requiring  the  weighing  of  the 
material  on  each  order.  Circumstances  alter  cases  and  it  naturally 
follows  that  in  such  instances  where  the  extra  expense  incurred 
in  securing  this  data  amounts  to  more  than  is  justifiable  in  pro- 
portion thereto,  a  more  general  scheme  of  distributing  material 
expense  can  be  used. 

A  factory  turning  out  a  line  of  injectors,  lubricators,  valves, 
and  grease  cups,  with  an  output  varying  but  little  from  year  to 
year,  would  be  justified  in  estabhshing  a  basis  of  material  expense 
distribution  by  classes  of  merchandise  manufactured.  Let  us 
assume  the  normal  material  expense  to  be  $3,ocx>  a  year  with  the 
output  as  follows :  — 

Injectors 6,000  pounds  =    10  per  cent  of  total  output. 

Lubricators 24,000      "        =    40    "      "  "  " 

Valves 18,000      "        =    30    «       « 


Grease  Cups 12,000 


20 


u  u 


Total 60,000  pounds  =  100  per  cent  of  total  output. 

The  material  expense  on  an  output  of  60,000  pounds  would 
amount  to  five  cents  a  pound.    Distributing  this  expense  among 


FACTORY  STATISTICS  513 

the  four  classes  of  merchandise  on  the  basis  of  the  output  in 
pounds  for  each  class,  the  charges  would  appear  as  follows:  — 

Pounds  Material 

Output  Expense 

Injectors 6,000  at  5  cents  per  pound  equals  $300 

Lubricators 24,000  "  5     "       «       "          «  1,200 

Valves 18,000  «  5     «       «       «          «  goo    , 

Grease  Cups 12,000  «  ^     «       «       «          «  ^qq 

Total 60,000  at  5  cents  per  pound  equals    $3,000 

Reference  to  the  cost  ledgers  at  this  point  shows  that  the  actual 
cost  of  the  raw  material  used  amounted  to  $9,000,  divided  among 
the  four  classes  of  merchandise  as  follows:  — 

Injectors $1,200 

Lubricators 3,900 

Valves 2,700 

Grease  Cups 1,200 

Total $9,000 

In  order  to  establish  a  basis  for  the  application  of  material 
expense  as  a  percentage  of  the  cost  of  the  raw  material  used  on 
each  class  of  merchandise,  it  is  only  necessary  now  to  reduce  this 
material  expense  charge  against  each  class  to  a  percentage  of  the 
raw  material  cost.  Working  this  out,  the  figures  appear  as 
follows:  — 

Cost  of  Raw  Percentage  Applied 

Material  Material  on  Bases  of  Raw 

Class  of  Merchandise  Used  Expense  Material  Cost 

Injectors $1,200  $300  25  per  cent 

Lubricators 3)900  1,200  31    "       " 

Valves 2,700  900  50   "       ** 

Grease  Cups 1,200  600  50   "       " 

Total $9,000        $3,000  33  per  cent 

A  percentage  has  now  been  established  for  the  application  of 
material  expense  to  each  class  of  merchandise.  By  simply  com- 
puting this  expense  directly  from  the  cost  of  the  raw  material 
used  on  each  order  the  proportionate  charge  for  this  expense  can 
be  reached  with  reasonable  accuracy. 


514  BUSINESS  STATISTICS 

XIII.   Collecting  Data  to  Compute  Costs  ^ 

By  Guroo  Sacerdote 

The  installation  of  a  cost  system  in  factories  producing  large 
varieties  of  goods,  especially  where  the  production  is  not  con- 
fined to  a  standard  and  continuous  production,  but  is  mixed 
witli  special  work,  experimental  work,  new  articles  to  be  added 
from  time  to  time  to  the  regular  line  of  manufacture  and  articles 
manufactured  only  intermittently  as  orders  are  received,  is 
indeed  a  much  more  serious  and  complicated  proposition  than  is 
the  case  in  factories  manufacturing  only  a  few  lines  of  standard 
goods. 

In  fact  it  is  just  this  class  of  factories  that  need  to  collect  the 
most  minute  and  exact  data  on  all  the  different  operations  that 
go  to  produce  a  certain  article.  It  is  in  this  class  of  factories  that 
it  is  most  desirable  to  install  or  extend  the  piecework  system  or 
premium  system,  or  both.  It  is  also  often  found  that  it  is  neces- 
sary to  keep  in  force  not  one,  but  four  different  systems  of  pay  at 
the  same  time,  according  to  the  nature  of  the  work,  and  whether 
the  rates  for  piecework  or  premium  are  already  established,  or 
will  be  established  when  sufficient  data  on  a  certain  article  have 
been  collected. 

The  other  two  systems  of  pay  usually  found  are  the  day  rate, 
which  is  absolutely  necessary  for  certain  classes  of  work,  like 
drawing,  toolmaking,  repairing  machines,  setting  machines  for 
work,  etc.,  and  the  gang  system,  where  a  foreman  has  a  contract 
at  a  certain  piece-rate  and  eitjier  pays  his  own  helpers  or  simply 
directs  their  work. 

Sometimes  a  factory  has  been  producing  on  either  or  all  of  these 
systems,  and  the  aim  is  to  simphfy  and  reduce  all  rates  to  piece- 
rate  or  to  premium  plan  wherever  possible.  Here  again,  all  the 
data  to  be  collected  must  refer  to  the  smallest  details  of  produc- 
tion, because  goods  manufactured  in  great  variety  are  usually  of 
moderate  dimensions  and  made  in  large  quantities. 

It  is  the  aim  of  this  article  to  describe  a  system  which  was 
installed  in  a  factory  producing  metal  goods  in  large  quantities 

^  American  Machinist,  November  9,  191 1,  pp.  870-874.  Reprinted  by  per- 
mission of  American  Machinist.     Forms  are  not  reproduced. 


FACTORY  STATISTICS  515 

and  enormous  variety,  and  having  twelve  different  departments, 
each  with  a  separate  foreman.  This  is  the  plant  of  Figli  di 
Raffaele  Sacerdote,  Turin,  Italy. 

It  was  run  in  the  manner  mentioned,  with  four  different  sys- 
tems of  pay;  a  system  was  in  existence  at  the  time  giving  fairly 
well  the  cost  of  the  finished  articles,  but  lacking  in  details  regard- 
ing the  different  operations  and  charges.  The  aim  in  installing  the 
new  system  was  to  obtain  as  complete  data  as  possible  regarding 
the  individual  operations,  in  order  to  correct  and  extend  the 
piecework  system  combined  with  a  premium  plan;  to  divide  the 
production  by  departments,  in  order  to  set  a  percentage  on  it;  to 
interest  directly  each  foreman  in  his  department;  to  render 
possible  the  direct  interchange  of  materials  in  course  of  manu- 
facture between  the  different  departments;  to  avoid  unnecessary 
movement  and  work  in  the  stockroom,  and  to  obtain  all  the  data 
relative  to  the  movement  of  materials  between  the  various 
departments  and  the  stockroom. 

In  a  system  of  this  kind  several  things  are  especially  important: 

1.  That  the  number  of  cards  to  be  handled  be  reduced  to  a 
minimum,  while  the  collection  of  details  from  them  be  as  complete 
as  possible. 

2.  That  the  system  be  simple  and  clear;  that  it  require  as  little 
writing  as  possible,  especially  from  the  workmen  themselves. 

3.  That  it  be  uniform  and  elastic  enough  to  adapt  itself  to  be 
used  in  all  classes  of  work  and  all  through  the  factory. 

4.  That  the  old  order  of  things  be  disturbed  as  little  as 
possible,  in  order  to  avoid  confusion  and  delays. 

5.  That  the  data  obtained  for  each  article  and  each  opera- 
tion be  automatically  filed  to  give  an  average  cost  on  as  large  a 
production  as  possible. 

6.  That  it  give  a  means  for  comparing  the  efficiency  of  the 
different  workmen  and  tools,  and  of  separately  computing  piece- 
work accounts  and  of  comparing  the  results  with  day-rate  costs. 

7.  That  full  data  be  obtained  regarding  the  cost  of  production 
and  maintenance  of  each  tool,  die,  pattern,  jig,  etc. 

8.  That  data  be  given  for  comparing  the  consumption  of  sup- 
plies, power,  etc.,  on  the  part  of  different  workmen  for  ultimately 


Sl6  BUSINESS  STATISTICS 

setting  a  standard  of  consumption  and  a  premium  on  savings 
effected. 

In  many  factories  the  piece-rates,  or  the  standard  times  for 
each  operation,  are  set  by  a  system  of  trials  made  by  special  men 
employed  for  this  purpose,  or  by  consultations  between  the 
superintendent,  foremen  and  workmen.  It  is  useless  to  recall  the 
imperfections  of  these  plans,  which  give  in  the  most  cases  erro- 
neous figures,  unfair  either  for  the  workman  or  for  the  employer. 

In  a  premium  plan,  founded  on  savings  effected  on  a  standard 
time  for  each,  operation,  it  is  desirable  that  the  standard  time  be 
proportioned  to  the  hourly  wages  of  each  workman;  in  fact, 
inversely  proportional  to  it  so  that  a  workman  who  has  been  given 
a  certain  wage  rate  must  work  by  its  relative  standard  time,  so 
that  he  has  a  chance  to  earn  his  wages  and  a  premium  besides. 

Owing  to  these  considerations,  the  plan  of  establishing  rates 
according  to  results  of  trials  was  discarded,  and  the  one  was 
adopted  of  collecting  a  great  number  of  data  extending  over  a 
long  period  for  each  operation,  so  that  rates  were  based  on  actual 
work  made  in  the  factory  under  all  possible  conditions. 

The  system  adopted  had,  therefore,  to  meet  two  prime  condi- 
tions: (i)  That  it  be  able  to  furnish  all  the  data  which  have  been 
mentioned  in  regard  to  labor,  material,  supplies,  direct  and 
indirect,  power  consumption,  etc.,  in  order  to  deduct  from  them 
the  standard  times  and  piece-rates,  and  the  standards  of  con- 
sumption of  supplies  and  power  in  each  operation.  (2)  That  it  be 
fit  for  being  kept  continuously  in  use  in  connection  with  work 
where  the  different  standards  and  rates  have  already  been  set 
and  in  connection  with  work  where  the  collection  of  data  is  to 
be  made,  in  order  to  estabHsh  the  standards. 

In  fact,  even  the  established  rates  need  to  be  revised  from  time 
to  time,  owing  to  changes  in  equipment,  materials  or  wages,  and 
as  new  articles  are  constantly  produced,  it  is  evident  that  the 
collection  of  new  data  must  constantly  be  maintained. 

The  data  to  be  used  for  the  future  setting  of  the  standards 
come  from  three  different  sources:  one  is  the  estimated  time 
based  on  a  graduation  of  difficulty,  or  in  other  words  on  the  wages 
of  the  class  of  workman  which  is  supposed  to  perform  the  opera- 


FACTORY  ST  A  TISTICS  5 1 7 

tion;  another  is  the  data  coming  from  the  workmen^s  time  cards; 
and  the  third  is  constituted  by  a  number  of  observations  of  the 
work  made  personally  from  time  to  time  by  the  superintendent, 
foremen  or  special  employees. 

It  is  my  intention  to  limit  myself  to  the  description  of  the  means 
used  for  collecting  the  various  data,  which  are  those  that  must 
be  carefully  devised  to  save  a  vast  amount  of  clerical  work.  The 
ultimate  setting  of  the  different  standards  and  rates,  and  the 
complete  simimaries  of  cost,  as  well  as  the  different  forms  giving 
information  as  to  indirect  expenses  of  various  kinds,  and  various 
card  indexes  to  be  used  for  inventory  or  correspondence  purposes 
will,  therefore,  not  be  considered. 

After  exhaustive  consideration,  it  was  decided  to  adopt  a 
scheme  where  all  the  work  was  planned  ahead  before  it  entered 
the  production  stage;  not  only  the  work  of  preparing  the  tools 
and  studjdng  the  various  questions  arising  with  the  production, 
but  also  all  the  time  cards  and  summaries  of  cost  of  labor  and 
material  to  be  used  in  connection  with  the  manufacture  of  each 
item  of  each  order.  All  the  writing  that  could  be  done  on  the 
cards  previous  to  their  distribution,  and  all  the  information  pos- 
sible relating  to  the  work,  were  prepared  in  the  factory  office  upon 
receipt  of  each  order. 

The  first  step  was  the  classification  of  the  goods  produced,  each 
class  being  assigned  a  set  of  consecutive  numbers  sufficient  for 
present  and  future  needs.  With  this  arrangement,  all  the  indexes 
and  documents  pertaining  to  articles  of  a  kindred  nature  could  be 
filed  together.  Its  advantages  were  most  marked  for  consulting 
records,  for  cataloguing  purposes  and  for  the  arrangement  of  the 
sample  room. 

To  give  an  idea  of  the  scheme:  To  the  class  "  Building  Hard- 
ware "  was  assigned  the  series  i  to  500;  "  Electrical  Supplies  " 
501  to  1000;  "  Car  and  Wagon  Accessories  "  1601  to  1500,  etc. 
Each  article  was  given  an  individual  number  and  the  different 
parts  of  an  article  were  given  the  same  number,  followed  by  an 
individual  letter.  For  instance,  supposing  the  distinctive  number 
of  "  15  Ampere  Single  Pole  Switch  "  to  be  No.  609,  the  different 
parts  were  numbered  as  follows:  — 


5l8  BUSINESS  STATISTICS 

15  Amp.  Single  Pole  Switch  Lever  No.  609-a 

«  «         «  «      Fulcrum  Part  No.  609-b 

«  «         «  «      Contact  No.  609-c 

«  «        «         "      Handle  No.  609-d 

When  a  part  entered  in  the  assembling  of  different  articles,  it 
was  considered  as  an  article  of  manufacture  by  itself  and  given  an 
individual  number. 

Different  card  indexes  were  prepared  containing  the  names  and 
numbers  of  the  articles,  alphabetically  or  numerically  ordered 
according  to  convenience,  and  kept  constantly  in  order.  One 
index  was  for  the  use  of  the  manager's  office,  one  for  the  corre- 
spondents, one  for  the  stockroom,  and  one  for  the  factory  office, 
which  in  the  present  instance  was  combined  with  the  drawing 
room. 

For  the  purposes  of  this  article  we  are  solely  interested  in  the 
form  adopted  for  the  factory  office  index.  Form  i. 

The  front  of  the  card,  besides  giving  the  number  and  name 
of  the  article,  gives  all  the  information  relative  to  the  sample 
representing  the  article,  if  any,  to  the  drawing,  patterns,  dies, 
tools  and  jigs  to  be  used  in  its  manufacture.  The  rest  of  the 
space  is  occupied  by  information  relating  to  materials,  scrap, 
composition  of  alloys,  etc.  This  is  information  for  the  use  of  the 
superintendent  to  prepare  the  necessary  tools  and  to  make 
requisition  of  materials  upon  receipt  of  the  order. 

The  back  of  the  card  has  all  the  necessary  information  relating 
to  the  way  in  which  the  article  is  manufactured.  The  first  two 
columns  give  the  sequence  in  which  the  different  operations  take 
place;  the  next  two  columns  give  the  department  and  the  machine 
in  which  the  respective  operations  are  to  be  performed;  the  fifth 
and  sixth  columns  relate  to  the  kind  and  numbers  of  the  special 
tools  for  each  operation;  the  next  two  columns  contain  informa- 
tion relative  to  power,  gas  for  soldering,  heat  for  forging,  etc., 
and  their  approximate  costs.  It  is  understood,  however,  that 
these  data  were  limited  only  to  such  operations  where  these  were 
applied  and  had  a  direct  bearing  on  the  cost  of  the  operations. 

The  next  four  columns  refer  to  time  —  estimated  and  set  — 
piece-rate,  and  premium  to  foreman  for  each  operation  and  for  a 
given  number  of  articles,  which  are  left  blank  to  be  filled  in  for 


FACTORY  STATISTICS  519 

each  case.  The  last  two  columns  provide  space  for  the  quality 
and  for  remarks.  Part  of  this  information  was  to  be  used  only  in 
the  future,  like  those  relating  to  standard  times  —  estimated  and 
set  —  premium  to  foreman  and  quality.  These  were  consequently 
left  blank  for  the  present  time. 

Of  this  Form  i  two  files  were  prepared,  one  in  alphabetical  and 
one  in  numerical  order.  These  constituted  the  basis  on  which  all 
the  system  was  founded. 

Upon  receipt  of  an  order  it  was  subdivided  into  its  different 
items.  For  those  items  which  had  been  manufactured  before 
and  for  which  Form  i  was  already  to  be  found,  the  summaries  of 
labor  and  material  and  all  the  time  cards  were  prepared  before- 
hand in  the  manner  which  we  will  describe  later.  For  the  items 
which  were  new,  the  first  step  was  to  prepare  all  the  drawings 
of  the  special  tools  necessary  for  production,  giving  a  number 
to  the  drawings,  tools,  patterns,  etc.,  and  to  fill  immediately  all 
the  cards  of  Form  i  relating  to  the  article  and  each  of  its  parts. 
All  the  information  relating  to  materials,  to  the  succession  of 
operations,  etc.,  in  fact  all  the  information  which  it  was  possible 
to  foresee,  was  inserted  on  the  cards,  and  these  entered  in  the 
indexes.  Then  the  work  for  these  proceeded  in  the  same  manner 
as  for  the  other  items. 

Let  us  now  examine  the  disposition  of  the  time  cards  and 
summaries  of  labor. 

The  time  cards  are  called  and  referred  to  as  "  Elements,"  and 
were  provided  in  different  colors,  one  color  for  each  department. 
These  were  designed  with  the  aim  of  giving  the  workman  all  the 
possible  information  in  regard  to  special  tools  and  machines  to  be 
used,  and  to  necessitate  on  the  part  of  the  workmen  and  foremen 
as  httle  writing  as  possible;  and  to  be  so  distinct,  furthermore, 
as  to  avoid  any  possibihty  of  mistakes. 

By  glancing  at  the  front  of  the  card,  and  in  fact  at  all  the  forms, 
the  special  study  is  apparent  which  has  been  given  to  the  division 
of  space  to  collect  all  the  useful  information  in  a  clear  way  and 
with  the  necessity  of  but  little  writing. 

The  front  of  the  "  Element,"  Form  2,  is  devoted  to  informa- 
tion relating  to  labor  and  power,  while  the  back  is  devoted  to 
movements  of  materials. 


S20  BUSINESS  STATISTICS  ' 

Each  element  refers  only  to  one  operation  on  the  same  article, 
belonging  to  the  same  order  and  performed  by  the  same  workman. 
The  front  contains  at  the  top  the  numbers  of  the  order  and  of  the 
article,  the  number  of  the  operation,  the  description  of  the  article 
and  of  the  operation  performed.  It  can,  therefore,  be  filed  accord- 
ing to  all  these  data  and  it  is,  in  fact,  filed  under  the  order  number 
before  the  work  is  started  and  during  its  progress;  under  the 
article  number  when  it  is  necessary  to  compile  the  summaries  of 
labor  for  the  article;  or  otherwise,  according  to  convenience  in 
the  course  of  filing  the  different  card  indexes  composing  the 
entire  cost  system. 

This  feature  was  found  to  be  very  valuable  indeed,  as  the  same 
card  was  used  over  and  over  until  all  the  data  had  been  reported 
in  the  proper  place. 

In  the  middle  section,  space  is  provided  for  marking  the  hours 
for  one  month.  If  the  work  should  start  on  a  day  different  from 
the  first  of  the  month,  on  the  nth  for  instance,  a  line  is  drawn 
between  the  loth  and  the  nth;  this  meaning  that  the  ele- 
ment runs  from  the  nth  of  one  month  to  the  loth  of  the  next 
month. 

Then  there  is  space  for  giving  the  time  employed  in  setting 
machines,  wages,  piece-rates,  and  amount  of  work  performed 
under  that  element. 

Besides  containing  the  data  relative  to  the  different  tools  to 
use,  there  is  space  to  be  filled  with  data  as  to  power,  gas,  steam, 
etc.,  used,  the  amount  to  be  computed,  naturally,  on  the  total  of 
the  hours  employed.  Finally  it  is  stated  on  the  card  whether  the 
work  is  performed  at  piece-rate,  day-rate,  or  otherwise,  whether 
the  rate  applies  only  to  the  operation  to  which  the  card  refers,  or 
whether  it  applies  to  the  same  in  combination  with  some  other 
operation,  given  on  some  other  card,  which  can  naturally  be 
performed  by  the  same  workman,  or  by  a  helper  of  the  same 
workman. 

The  back  of  the  card  contains  data  as  to  materials  received  and 
delivered  by  the  workman  on  that  particular  job.  The  material 
may  come  from  the  stockroom  or  from  a  different  department,  and 
may  be  delivered  in  the  same  way.    When  the  work  is  passed 


FACTORY  STATISTICS  52 1 

from  one  department  to  another  it  is  always  preferable  that  the 
respective  foremen  be  present. 

The  summary  of  direct  labor,  Form  3,  is  compiled  from  the 
cards,  Form  2.  The  front  is  devoted  to  the  cost  of  the  several 
operations  going  to  make  a  complete  article  for  a  single  order. 
The  back  is  devoted  only  to  collecting  information  on  a  single 
operation  of  the  article  written  on  the  front,  for  different  orders 
but  for  the  same  workman. 

The  summary  of  material  is  on  Form  5,  and  for  convenience 
in  writing  has  been  made  in  the  shape  of  a  folder  composed  of 
two  cards  of  the  same  size  as  the  summary  of  labor;  the  two 
can,  therefore,  be  filed  together  when  convenient.  In  other 
respects  the  form  has  nothing  to  distinguish  it  particularly  from 
other  forms  in  common  use,  and  contains  the  ordinary  data 
required  as  to  the  movements  of  materials  between  the  stock- 
room and  the  factory.  Each  summary  is,  however,  limited  to 
a  certain  article  belonging  to  a  certain  order  number. 

Let  us  see  now  how  the  system  works.  Supposing  an  item  of  a 
certain  order  is  an  article  composed  of  two  parts,  three  cards  of 
Form  I  will  be  found  in  the  index  of  the  factory  office;  one  for  the 
article  complete  —  the  operations  for  this  will  probably  be  assem- 
bling, packing,  finishing,  etc.  —  and  one  for  each  part.  Full 
information  is  given  in  each  as  to  the  tools,  operations,  etc.,  as 
described.  For  the  purposes  of  the  system,  each. Form  i  re- 
quires a  complete  set  of  elements  and  summaries  of  labor  and 
material. 

For  each  Form  i,  therefore,  the  clerk  fills  the  front  of  one  smn- 
mary  of  labor  with  the  numbers  of  the  order  and  of  the  article, 
quantity  ordered  and  description;  then  he  fills  the  first  and 
third  columns  with  the  numbers  of  the  elements  and  the  name 
of  the  corresponding  operations;  these  he  deduces  from  the 
back  of  Form  i.  The  back  of  the  same  summary  he  prepares 
with  the  name  of  one  operation,  inserting  the  number  of  the 
order  in  the  first  space  of  the  first  column.  Then  he  prepares  in 
the  same  manner  on  the  back  as  many  summaries  of  labor  as 
there  are  operations  in  the  article  referred  to  and  proceeds  to 
prepare  the  different  element  cards. 


522  BUSINESS  STATISTICS 

These  he  fills  out  in  the  same  manner,  leaving  the  workman's 
name  in  blank,  also  the  wages,  and  inserting  the  piece-rate  if  any. 

The  element  cards  will  be  of  different  colors  according  to  the 
departments  in  which  the  different  operations  have  to  be  per- 
formed; they  will  evidently  be  equal  in  number  to  the  cards  of 
summaries  of  labor.  Furthermore,  one  summary  of  material  will 
be  prepared  with  the  number  of  the  order  and  number  and  name 
of  the  article. 

All  these  cards  are  put  in  special  drawers  of  "  Orders  waiting," 
ready  for  being  distributed  when  the  work  is  started.  The  sum- 
maries of  material,  however,  are  at  the  disposal  of  the  stock- 
room, as  soon  as  the  requisition  forms  have  been  filled. 

After  the  work  is  started,  the  element  cards  are  gradually  dis- 
tributed to  the  different  departments  as  the  work  progresses; 
from  the  design  it  can  be  seen  that  the  same  card  will  last  for  one 
month;  all  the  workman  or  the  foreman  has  to  do  is  to  insert  the 
number  of  hours  each  day  in  the  space  provided  for  each  date. 

The  element  cards  do  not  return  to  the  factory  office  until  they 
are  finished;  more  are  issued  from  time  to  time  for  special  opera- 
tions not  anticipated,  or  for  renewals.  They  are  reported  on  the 
front  of  the  summary  cost  card.  All  the  element  cards  are, 
however,  returned  at  the  end  of  each  month  for  registration  of 
piece-rate  accounts,  to  go  back  to  the  respective  workmen  as 
soon  as  this,  be  completed.  The  workmen  are  in  the  meantime 
paid  at  the  day-rate,  while  the  premiums,  piece-rate  differences, 
etc.,  are  paid  at  the  end  of  each  month. 

When  a  completed  element  card  is  returned,  the  data  contained 
on  the  front  are  reported  in  the  summary  of  labor,  and  also  on  the 
back  of  the  summary  card  devoted  to  that  particular  operation; 
and  so  on  until  all  the  cards  have  been  returned  on  a  certain  job. 

The  back  of  the  card  is  used  especially  for  controlKng  the 
individual  movements  of  material;  all  the  movements  from  and  to 
the  stockroom  are  inserted  in  the  summary  of  material  at  the 
moment  they  take  place. 

At  the  finishing  stage  of  the  job  we  have,  therefore,  as  many 
summary  cards  for  labor  as  there  are  operations.  The  time  cards 
or  elements,  however,  which  we  had  to  handle  have  been  very 


FACTORY  STATISTICS  523 

limited  in  number,  on  account  of  their  lasting  for  such  a  long  time. 
If  weekly  reports  are  issued,  they  can  be  compiled  also  from  the 
element  cards,  returning  them  to  the  workmen  at  the  beginning 
of  the  new  week. 

When  a  second  order  for  the  same  article  is  received,  the  same 
summaries  of  labor  are  used  —  filling  the  front  of  the  second  sum- 
mary, and  filling  the  second  line  of  each  on  the  back  for  the 
respective  order  and  operation. 

When  as  many  orders  have  been  completed  on  a  certain  article 
as  there  are  operations,  the  set  of  summaries  of  labor  is  complete. 
We  have  in  this  manner  obtained  in  compact  order  and  with  little 
effort  many  summaries  of  the  cost  of  the  complete  article  on  the 
front  of  the  cards,  and  the  cost  of  each  operation  for  each  work- 
man so  disposed  as  to  give  the  average  cost  of  that  operation 
distributed  over  a  large  production  and  a  considerable  number  of 
orders.  Keeping  these  data  separate  for  each  workman  gives, 
moreover,  means  for  comparing  relative  capacities  and  efiiciencies. 

It  is  seen  that  at  the  end  a  very  limited  number  of  cards  have 
to  be  filled  and  handled,  each  requiring  a  moderate  amount  of 
work  in  order  to  be  filled.  It  can  readily  be  seen  how  elastic  such 
a  system  is  where  all  the  documents  can  be  filed  in  different  ways, 
according  to  convenience. 

To  give  an  idea  of  the  simplicity  of  the  system,  when  installed 
two  girls  were  all  that  were  needed  to  keep  the  system  running. 
The  factory  employed  about  160  hands,  and  manufactured  not 
less  than  3000  different  articles  in  the  first  six  months  in  which  the 
system  was  working. 

A  few  words  about  the  manner  in  which  the  data  relating  to 
special  tools,  dies,  patterns,  etc.,  were  collected  may  not  be  out 
of  place. 

Form  4  is  intended  to  serve  as  an  index  card,  as  a  permanent 
inventory,  sunmiary  of  labor  and  material  for  the  construction 
of  the  tool,  and  summary  of  labor  and  material  for  its  mainte- 
nance. The  aim  in  view  is,  of  course,  to  save  as  much  clerical 
work  as  possible,  and  to  handle  as  few  cards  as  possible. 

For  each  class  of  tools  there  was  a  different  color  of  cards.  The 
front  was  devoted  to  such  information  as  more  closely  pertained 


524  BUSINESS  STATISTICS 

to  each  particular  class  of  tools.  On  the  front  of  the  form  used 
for  dies,  for  example,  is  given  all  the  information  relating  to  the 
number  of  the  tool,  the  operation  performed,  its  location,  etc., 
and  the  value  placed  on  it  in  the  different  inventories. 

The  backs  of  the  cards  were  alike  for  all  classes  of  tools.  The 
work  in  producing  and  repairing  equipment  was  always  done  by 
day-rate;  besides,  the  data  as  to  material  need  not  be  so  partic- 
ular. The  items  were  summarized  on  this  card,  and  when  the 
tool  was  completed  a  heavy  line  was  drawn  underneath  the  totals. 
The  remainder  of  the  card  was  then  devoted  to  future  expenses  for 
maintenance,  the  costs  relating  to  production  being  reported  at 
the  right  on  the  top,  and  those  relating  to  maintenance  at  the 
right  on  the  bottom.  The  total  production  being  known  during 
a  given  period  of  time,  the  expenses  for  production  and  main- 
tenance could  be  properly  subdivided  and  charged  in  the  right 
proportion  when  compiling  the  general  summaries  of  cost. 

XIV.  Methods  of  Cost  Finding  in  Cotton  Mills  * 

By  William  G.  Nichols 

In  a  mill  having  a  wide  variety  of  product,  the  conditions  are 
usually  different  from  those  obtaining  in  a  small  mill  or  one 
engaged  in  the  manufacture  of  yams  or  one  or  two  classes  of 
goods. 

1.  In  the  nature  of  the  case,  it  is  usually  a  large  mill,  having 
numerous  mill  buildings,  and  filled  with  machinery  in  all  con- 
ditions of  wear,  and  sometimes  not  the  best  adapted  to  work 
produced. 

2.  In  a  small  mill  one  efficient  clerk  will  keep  a  written  or  men- 
tal record  of  everything  that  goes  on.  He  can  check  freight  bills 
and  invoices,  make  up  payrolls,  enter  reports  and  make  up  tables 
of  production,  etc.  In  a  large  mill,  the  organization  is,  or  should 
be,  more  complete,  and  the  systems  of  reports  arranged  so  that  a 
close  watch  may  be  kept  of  the  expenses,  of  the  condition  of  work 

^  Transactions  of  New  England  Cotton  Manufacturers*  Association,  No.  68, 
pp.  251-271.  Reprinted  by  permission  of  National  Association  of  Cotton 
Manufacturers.     Illustrations  of  several  forms  are  omitted. 


FACTORY  STATISTICS  525 

in  process,  of  production  of  machines,  and  of  rate  of  progress  of 
orders.  Accounts  in  the  oflSces  and  departments  are  kept  by  those 
who  are  expert  in  this  work.  A  record  is  thus  made  of  many  facts 
and  data,  which  are  useful  or  necessary  in  the  actual  subdivision 
of  expense.  There  is  thus  available  a  large  amount  of  the  infor- 
mation necessary  to  the  minute  division  of  outlay,  and  the  skill 
and  practical  knowledge  for  its  classification. 

Most  of  the  data  necessary  for  such  a  system  of  cost-finding 
as  the  following  are  recorded  as  the  work  progresses,  and  used 
in  making  up  payrolls,  reports  of  production,  etc. 

By  recording  these  facts  in  such  a  way  that  they  are  available 
for  cost-finding,  much  of  the  apparent  labor  of  such  a  method  as 
this  is  eliminated.  The  items  are  on  record,  somewhere.  They 
should  be  arranged  so  as  to  be  utilized. 

In  discussing  the  matter  of  cost-dividing,  one  frequently  hears 
it  stated  that  expenses  should  be  divided  as  if  all  a  mill  were  run 
on  one  class  of  work.  This  is  right  as  a  principle,  but  when  we 
attempt  to  apply  it  we  find  practical  obstacles.  Suppose  an 
estabhshment,  one  part  of  which  is  used  for  the  production  of 
fine  goods  and  another  for  cloths  of  a  much  coarser  grade.  If  all 
the  mill  were  turned  to  the  making  of  the  coarser  goods,  there 
would  be  a  relative  loss  in  the  quality  and  quantity  of  production, 
and  a  more  than  corresponding  increase  of  cost.  There  must 
therefore  be  devised  some  way  to  carry  out  the  theory  underlying 
the  principle.  Let  us  change  the  statement  to  the  following: 
Expenses  should  be  divided  in  the  proportion  which  they  are 
incurred  by  the  machinery  engaged  in  making  each  class  of  goods. 
If  this  be  correct,  we  have  then  reduced  the  problem  of  the 
division  to  the  analysis  of  the  expenses  of  manufacture,  and  the 
method  of  computing  the  same.  And  the  more  easily  and  simply 
this  work  can  be  well  done,  the  more  promptly  will  results  be 
secured  after  the  books  are  closed. 

If  one  undertakes  to  obtain  accurate  results,  however,  a  con- 
siderable amount  of  detail  and  clerical  labor  is  indispensable. 

The  present  paper  is  a  sketch  of  method  for  the  determination, 
as  far  as  may  be  practicable,  of  the  costs  of  manufacture  in  an 
establishment  making  fine  and  coarse  organizations,  both  white 


526  BUSINESS  STATISTICS 

and  colored,  selling  a  part  of  its  product  as  yam,  buying  other 
kinds  of  yam,  and  using  various  kinds  of  stock  for  different 
qualities  of  goods. 

It  will  seem  to  some  that  these  conditions  are  extreme  and 
beyond  likelihood  to  any  actual  occurrence.  But  while  extremes 
are  purposely  selected,  they  are  not  more  varied  than  existing 
conditions  in  more  than  one  plant  in  New  England. 

We  may  suppose  that  a  certain  plant  has  been  in  operation  for 
six  months,  and  has  produced  the  goods  scheduled  below.  Let 
us  first  glance  at  the  physical  condition  of  the  mill.  It  is  in  part 
old,  part  new.  The  older  portion  of  the  earUer  style  of  mill 
architect  is  driven  by  water  power.  The  later  mill  is  driven  by 
steam,  is  of  modem  constmction,  so  far  as  the  circumstances  will 
allow,  and  fitted  with  machinery  in  good  condition.  There  is  a 
finishing  department  for  the  colored  goods,  while  white  goods  are 
disposed  of  in  the  grey,  warehouses  for  the  storage  of  cotton  and 
goods,  and  tenements  for  the  operatives. 

When  the  accounts  are  made  up,  it  is  found  that  goods  have 
been  produced  to  the  following  amounts  and  with  the  accom- 
panying particulars.  —  Table  A. 

[This  table,  which  is  not  reproduced,  shows  vertically  the 
kind  of  goods.  For  each  kind  of  goods  entries  are  made  in  the 
following  columns:  —  (i)  width;  (2)  pounds  produced,  six  months; 
(3)  number  of  yarn,  warp  and  filling;  (4)  per  cent  of  warp,  and  of 
filling;  (5)  pounds  of  warp  or  filling,  six  months,  weekly;  (6)  num- 
ber of  looms;  (7)  pounds  per  week  per  loom;  (8)  total  pounds 
from  looms.  This  is  followed  by  statistics  for  production  by 
sizes  of  yam  on  spinning  frames,  and  on  mules,  and  for  quantity 
combed.    At  the  bottom  of  the  table  each  column  is  totaled.] 

The  first  four  columns  give  necessary  data  of  the  organization. 
Column  4  states  the  percentage  of  the  cloth  which  is  warp,  and 
that  which  is  filling.  In  computing  this  the  number  of  the  yam 
should  be  taken  from  the  average  weighings  of  the  six  months, 
and  not  as  the  nominal  number  given  in  column  3. 

If  the  weight  of  the  cloth  from  the  loom  given  in  column  2 
be  multiplied  by  the  percentage  of  warp  or  filling  in  the  cloth,  it 
will  give  the  pounds  of  yam  which  are  necessarily  used  in  its 


FACTORY  STATISTICS  527 

production.  These  are  extended  into  columns  7,  8,  etc.,  and 
as  the  same  kind  of  yam  frequently  has  several  uses,  the  footings 
of  these  columns  give  the  total  amount  necessary. 

Having  obtained  this  schedule  of  the  output  of  the  mill,  we 
next  take  up  the  statement  of  expenses  and  income. 

An  examination  of  manufacturing  costs  will  disclose  that  they 
may  be  divided  into  three  classes:  — 

1.  Material  or  stock.  That  is  cotton  of  various  grades,  waste 
or  yam  used. 

2.  Labor  of  manufacturing. 

3.  Those  miscellaneous  and  general  expenses  such  as  repairs, 
supplies,  sizing  materials,  power,  insurance,  taxes,  depreciation 
and  administration. 

Taking  these  in  the  order  mentioned  we  have  first  to  deal 
with :  — 

The  Cost  of  Stock 

It  is  impossible  to  make  accurate  estimates  without  knowledge 
of  the  quantities  of  stock  used  and  goods  produced.  In  this 
method  the  woven  goods  are  all  weighed  in  the  grey  immediately 
after  weaving,  and  yams  sold  are  of  course  weighed  for  sale.  A 
table  showing  the  pounds  of  yarn  sold,  or  necessary  for  making 
each  kind  of  goods,  as  shown  in  Table  A,  but  classified  according 
to  the  grade  of  stock  represented,  is  first  prepared  as  given  in 
Table  B  on  the  next  page. 

It  will  be  noticed  that  there  are  five  kinds  of  stock  used :  — 

Gulf  cotton  for  warp,  at  an  average  cost  of  7       cents. 

Upland  cotton,  for  filling,  at  an  average  cost  of    6.80     " 
Egyptian  cotton  carded,  at  an  average  cost  of    14  " 

Egyptian  cotton  combed,  at  an  average  cost  of  14  " 

Waste,  at  an  average  cost  of  4  " 

Yam  purchased,  at  an  average  cost  of  80  " 

As  is  frequently  the  case,  something  in  the  way  of  economy  in 
stock  is  sacrificed  for  the  purpose  of  using  as  few  grades  as 
possible,  avoiding  constant  change,  and  risk  of  running  short  of 
some  grade. 

It  is  not  sufficient  to  take  for  granted  that  so  many  pounds  of 
stock  required  have  made  the  pounds  of  yam  required  and  used 


528 


BUSINESS  STATISTICS 


2i 


5 

8 

? 

8 

5 

8 

M 

M 

W5 

^ 

t^ 

M 

o 

00 

'.        00 

t^ 

«     8 

IT)  O 


1 

•3 


8      § 


PQ 


^» 


t^  o  t^ 


c3o 


I 


I  I  I  1  I 


I  I 


3  i 


FACTORY  STATISTICS  529 

in  weaving  or  otherwise.  In  mills  making  a  large  variety,  the 
stock  on  hand  changes  so  much  as  regards  quantity  and  quality 
that  this  fact  must  be  taken  into  account.  For  instance,  in  taking 
this  account  of  stock  in  process,  at  the  close  of  the  six  months  it 
was  found  that  there  were  5,200  pounds  of  No.  50  combed  yarn 
on  hand  over  the  last  inventory.  Briefly  stated  the  process  of 
finding  the  cost  of  materials  is  as  follows:  — 

Obtain  the  total  amount  and  cost  of  each  grade  of  stock  put 
in  process. 

Deduct  from  this,  at  the  present  value,  the  amount  in  pounds 
and  dollars,  which  this  inventory  shows  over  the  one  last  pre- 
ceding, or  vi€e  versa. 

Deduct  in  each  grade  of  stock  the  value  of  waste  made.  If  the 
waste  from  one  class  of  stock  has  been  used  for  another,  it  should 
be  credited  to  the  grade  where  made,  and  charged  to  the  other 
grade,  where  it  is  consumed. 

Divide  the  cost  of  each  grade,  as  now  obtained,  by  the  pounds 
of  yam  made.  If  more  than  one  grade  enters  into  a  fabric,  the 
proportionate  part  of  each  is  taken  at  its  own  price. 

In  obtaining  the  value  of  stock  on  hand  a  table  is  convenient, 
and  it  is  also  useful  in  affording  details  required  in  finding  the 
labor  cost. 

The  Cost  of  Manufacturing  Labor 

By  the  term  "  Manufacturing  Labor,"  it  is  meant  to  define 
only  that  labor  bestowed  upon  direct  manufacturing  operations, 
such  as  carding,  dyeing,  and  weaving,  and  not  the  labor  expense 
of  repairs,  power,  and  other  departments  equally  necessary  but 
not  handling  the  stock  in  process  of  conversion  into  yarns  or 
fabrics. 

As  in  determining  the  cost  of  material,  the  first  operation  is  the 
preparation  of  a  statement  of  product;  the  same  plan  is  followed 
in  determining  the  labor  cost;  and  a  table  should  be  prepared 
smnmarizing  all  these  labor  costs  that  none  may  be  omitted  in 
the  distribution. 

The  labor  cost  in  some  departments  of  a  mill  can  be  separated, 
each  to  its  own  mark  of  goods,  much  more  easily  and  accurately 


S30  BUSINESS  STATISTICS 

than  in  others.    As  a  rule  this  is  the  case  the  further  toward 
completion  the  goods  have  passed. 

For  instance,  on  the  cards  material  may  go  through  in  the 
same  manner,  to  be  used  for  fine  or  coarse  work,  as  it  passes  to 
the  roving  frames,  part  of  the  same  hank  roving  may  be  used 
on  spinning  frames,  and  part  put  behind  a  finer  roving  frame 
for  another  operation.  The  yarn  made  in  the  former  case  may 
be  used  in  a  dozen  grades  of  goods,  which  may  each  receive 
separate  treatment  in  weaving,  and  further  divided  by  particular 
treatment  in  finishing. 

The  methods  of  getting  at  the  cost  will  therefore  vary  in  differ- 
ent departments.  In  general  they  may  be  defined  as  a  division 
and  classification  of  the  payrolls,  at  the  time  the  labor  is  per- 
formed and  the  payroll  made  up,  and  a  summary  of  the  results 
at  the  end  of  the  half  year. 

In  the  card  room  this  is  effected  by  the  notation  on  the  payroll, 
in  a  column  provided  for  the  purpose,  of  the  occupation  of  each 
employee,  and  if  more  than  one  kind  of  work  passes  through  the 
room,  the  kind  each  employee  is  engaged  on.  When  the  work  has 
reached  the  slubber  and  roving  frames,  a  record  is  kept  of  the 
hanks  or  pounds  produced  at  each  hank  roving,  whether  fine  or 
coarse,  and  the  wages  paid  for  producing  it.  If  any  frame  is 
changed  from  fine  roving  to  another,  a  corresponding  note  is 
made  of  the  time  it  was  done,  and  the  length  of  run  on  each  hank. 

These  amounts  are  posted  from  each  payroll  to  a  sort  of  ledger 
that  they  may  be  added  at  the  end  of  the  six  months.  At  that 
time,  also,  the  wages  of  employees  on  pickers,  cards,  and  drawing 
frames  are  added. 

If  we  now  wish,  under  circumstances  existing  in  this  mill,  to 
ascertain  the  card-room  cost  of  making  the  warp  yarn  in  the 
print  cloth,  we  proceed  as  follows,  taking  the  data  from  Table  A. 
Yarn  28,  from  4.2  hank  roving,  made  on  fly  frames  supplied  by 
1.5  hank  roving  made  from  .6  hank  slubber  roving.  We  find  the 
total  amount  of  yarn  made  from  .6  slubber  roving,  which  was 
consumed  in  making  the  woven  product  and  yarn  sold,  to  be 
1,700,254  pounds.  Next  find  how  the  stock  in  process  at  the 
end  of  the  half  year  compares  with  the  stock  at  the  begin- 


FACTORY  STATISTICS  53  I 

ning  from  tables  previously  referred  to.  It  will  be  necessary 
to  compare  the  weights  of  .6  hank  roving  and  the  aggregates  of 
all  rovings  and  yarns  in  all  operations  previous  to  woven  cloth 
where  said  yarns  are  made  from  .6  hank.  We  may  suppose  this 
is  found  to  be  35,000  pounds  more  at  the  end  of  the  six  months 
than  at  the  beginning,  which  should  be  added  to  1,700,254  as 
these  35,000  pounds  of  roving  have  been  made  above  what  was 
used  in  cloth  produced,  etc. 

The  cost  of  this  card  room  thus  far  is  summarized  from  the 
payrolls,  as  follows:  — 

Oversight,  General,  scrub,  elevator, 

Section  hands,  grinders,  strippers,  Slubber  tenders, 

Railway  and  drawing  tenders,  Doffers. 

Total  cost  divided  by  1,735,254  equals  cost  per  pound  of 
carding  .6  hank  roving. 

Next  find  the  additional  charge  for  running  this  through  the 
intermediate  frame,  making  1.5  hank  roving.  From  the  records  we 
may  find  that  509,436  pounds  of  1.5  hank  roving  was  required 
for  goods  produced,  and  from  tables  not  shown,  that  the  excess 
of  stock  at  the  close  of  the  six  months  was  10,000  pounds.  Total 

519,436. 
The  payrolls  show  the  following  costs:  — 

Section  hand. 
Intermediate  tenders, 
(  Oilers. 

Here  we  first  encounter  the  problem  of  dividing  the  expense  of 
overseeing  and  those  general  duties  which  have  no  direct  relation 
to  any  particular  class  or  grade  of  stock  or  machinery,  but  have 
usually  to  do  with  the  care  of  the  rooms,  such  as  sweepers,  eleva- 
tor hands,  water  carriers,  and  that  third  genus  of  employees,  such 
as  roving  carriers,  oilers,  doffers,  band  boys,  etc.,  who  have  to  do 
with  machinery  running,  perhaps,  on  a  dozen  different  kinds  of 
work,  and  in  a  way  that  makes  it  impossible  to  do  better  than  to 
estimate  the  equitable  division  of  the  expense. 

There  are  one  or  two  principles  which  may  guide  us  in  making 
these  divisions :  — 


532  BUSINESS  STATISTICS 

1.  That  those  who  work  about  the  room  and  in  the  keeping  of 
machinery  in  condition  for  service,  as  section  hands,  oilers,  and 
scrub  women,  are  independent  of  the  product  of  the  machinery 
and  their  wages  should  be  divided  according  to  the  machines  or 
spindles  treated. 

2.  The  case  of  doffers,  roving  carriers,  filling  carriers,  etc.,  is  a 
different  one;  their  number  is  proportioned  more  nearly  by  the 
amount  of  work  produced  by  the  machinery,  and  not  by  the 
number  of  machines  themselves. 

A  roving  frame  on  20  hank  will  need  as  much  oiling  as  one  on 
2  hank,  but  it  will  have  no  use  for  doffers.  The  best  rule  for  the 
division  of  such  labor,  therefore,  is  in  the  ratio  of  production  in 
pounds. 

3.  Overseers,  second  hands  and  bookkeepers  in  large  rooms 
have  to  do  with  the  quality  and  quantity  of  production,  but  more 
directly  with  people  than  machines.  And  while  it  is  true  that  one 
alley  boy  may  need  more  watching  than  the  best  slubber  tender, 
all  things  considered,  it  is  perhaps  as  fair  a  rule  as  any  to  divide 
such  expense  last  of  all  and  apportion  it  as  all  other  labor  divides 
itself. 

After  the  same  manner  we  find  the  amount  of  4.2  hank  roving 

to  have  been  509,436  plus  10,500  pounds  equals  519,936  pounds. 

And  the  cost  of  running  over  fly  frames 

Section  hand, 
Fly  frame  tenders, 
Doffers, 
Roving  hands, 
Sweepers. 

Total  cost  on  fly  frames  divided  by  519,936  pounds  equals  cost 
per  pound. 

We  may  thus  tabulate  the  labor  cost  of  making  4.2  hank 
roving:  — 

Carding,  cents  per  pound. 

Slubbers,  «       «        « 

Intermediates,     «       «        « 
Fly  frames,  "       " 

But  there  are  35,000  pounds  of  stock  on  hand  in  process,  above 
the  stock  six  months  ago,  which  has  passed  through  the  operation 


FACTORY  STATISTICS 


533 


of  carding  in  this  room.  It  has  been  stated,  previously,  that  this 
along  with  other  kinds  has  already  been  placed  to  the  credit  of 
the  stock  used,  and  it  is  carrying  out  the  same  practice  that  these 
35,000  pounds  are  made  a  part  of  the  divisor  for  finding  the  cost 
per  pound. 

In  fact,  the  increase  of  stock  in  process  is  credited  to  cotton 
accoimt,  before  the  books  of  the  corporation  are  closed,  and  the 
labor  expended  on  this  35,000  pounds  together  with  other  simi- 
lar labor  is  credited  to  the  account  of  manufacturing  labor  as 
being  a  valid  part  of  the  inventory.  In  the  same  way  dyestuffs 
expended  on  stock  in  process  are  placed  to  the  credit  of  dyestuffs 
account. 

Table  E 

Card  Room  Statement,  Six  Months  Ending 


Oi)eration 

Size 
Hank 
Roving 

Pounds 
Made 

PayroU 

Remarks 

Labor 
Account 

Picking   

.6 
1.2 
i-S 
3. 
42 
9. 

2,880,000 

1,800,000 

1.735.254 

935.000 

549,876 

930,000 

550,376 

151,000 

1,035,000 

157,784 

157.000 

1,040,000 

1,045.000 

770,000 

77,000 

$2,877-94 
5,506.18 
1.785.24 

936.00 

660.66 
2,040.61 
1.293.59 

907.28 
2,810.26 
1,262.27 
1,184.00 
1.305-00 
1,960.00 
1,930.09 

626.29 

760  spindles!    ^g^ 

S20           "         j 

spindles)    . 
u       >  3840 

Average  Cards  50  \ 
-           -     20/7° 

Cr. 
Cr. 
Cr. 
Cr. 
Cr. 
Cr. 
Cr. 
Cr. 
Dr. 
Cr. 
Cr. 
Dr. 
Dr. 
Cr. 
Cr. 

$7.26 
45-37 
35-00 
14.72 
11.00 

Carding  No.  i 

Slabbing  No.  i 

Intermediates 

44.00 
26.25 
30.00 
25.87 
41.60 
39-00 
12.00 
9.00 
9.60 

u        « 

Jack    *     

Carding  No.  2 

*        for  combing  . 

Combing  No.  2 

Slubbers  No.  2 

Intermediates  No.  2.  . 

Fly  frames  No.  2 

Jack   «         «     ' 

$27,085.41 

Table  E  shows  the  summary  of  the  card  room  payrolls  for  the 
half  year.  This  shows  the  total  cost  of  the  various  operations  in 
this  department,  arranged  so  that  we  may  separate  the  cost  of 
each  step  in  the  progress  of  the  work.  It  is  supposed  that  there 
are  two  card  rooms,  but  only  one  picker  room,  and  that  in  each 
card  room  an  account  is  kept  of  the  spindles  on  each  size  of 
roving.  It  also  shows  the  amount  paid  in  the  card  room  for  labor 
on  the  stock  in  process  over  and  above  what  was  in  process  six 


534 


BUSINESS  STATISTICS 


months  ago.  The  amount  in  itself  is  not  of  much  importance  in 
the  card  room,  but  in  following  this  system  it  is  of  great  impor- 
tance in  subsequent  operations,  as  the  amount  of  some  particular 
class  of  work  may  greatly  change,  although  the  average  value  of 
stock  in  process  may  not  be  much  affected. 

The  expense  of  each  operation  should  receive  credit  for  all  work 
done  on  stock  on  hand  in  excess  of  six  months  previous  and  an 
extra  charge  should  be  made  for  labor  if  the  stock  in  process  has 
decreased.  Tables  similar  to  this  are  made  up  for  each  department 
of  the  mill. 

In  the  spinning  and  spooling  room  we  will  meet  almost  the 
identical  conditions  as  among  the  roving  frames,  and  may 
determine  the  cost  after  the  same  methods. 

In  the  warp  room  we  are  able  to  go  one  step  further  toward 
accurate  division,  in  that  we  may  commonly  assign  directly  to 
each  mark  of  goods  the  cost  of  the  machine  tender's  wages. 

Each  warp  tender  is  provided  on  Monday  with  the  following 
ticket,  and  it  is  understood  that  her  wages  are  made  up  from  it, 
so  that  there  is  small  chance  for  any  omission,  and  any  work  done 
by  the  day  must  also  appear  on  the  ticket  in  order  to  receive 
credit  on  the  time  book. 


Warping  Room  . .  .(??™P!oy?.e.'s  .^ame)  Week  ending 


Mark 


Pattern 


No. 

Yam 


Ends 


Yards 

or 
Warps 


Pounds   Time 


Rate 


Amt. 


Check 


These  tickets  are  returned  to  the  office  with  the  pa)a'oll,  and 
the  charges  for  warping  each  mark  of  goods  are  posted  into  a 
book  kept  for  the  purpose. 

The  wages  of  other  hands  are  separated  into  various  classes  as 

T5dng  hands, 

Section  and  beam  truckers. 


FACTORY  STATISTICS 


535 


The  wages  of  tying  hands  are  divided  according  to  the  pounds 
of  each  kind  of  yarn  done,  on  the  principle  that  it  costs  the  same 
to  tie  a  full  spool  of,  say,  a  pound  weight,  whether  filled  with  20 
or  50  yarn. 

The  wages  of  other  helpers,  as  truck  hands  and  section  hands, 
are  divided  according  to  the  proportion  of  wages  of  warpers. 

The  labor  of  beaming  and  chain  quilling  for  colored  work  is 
treated  in  the  same  way,  on  blanks  ruled  in  almost  the  same  form. 
In  dressing  and  web  drawing  the  same  principle  is  appUed  in 
blanks  ruled  as  follows :  — 


Dressing  Rc 

)0M       OE 

mployee's 

name) 

Week  ending 

Mark 

No. 
Yarn 

Ends 

Yards 

Pounds 

Hours 

Amt. 

Check 

Twisting  |         (Employee's  name) 

Web  Drawing/ 


Week  ending. 


Pat- 
tern 

Ends 

Cuts 

H'mess 

BEAMS 

Hours 

Rate 

Amt. 

Mark 

M. 

T. 

W. 

T. 

F. 

S. 

Check 

The  remaining  payroll  is  classified  and  then  divided  as  follows: 


Overseeing, 
Slasher  helpers, 
Sweeper  and  scrub, 
Truckmen,    | 
Sizemaker,     ? 
Snarler,         J 


Divide  same  ratio  as  total  slashers  and  web  drawers. 


"  poimds  done. 


536  BUSINESS  STATISTICS 

The  cost  of  weaving  is  always  one  of  the  easiest  to  detennine. 
Looms  are  Hmited  in  their  adaptability  to  different  sorts  of  goods, 
and  though  one  weaver  may  tend  looms  holding  warps  of  various 
marks  there  is  usually  a  different  price  per  cut  for  each.  The 
number  of  cuts  of  each  kind  of  cloth  multiplied  by  the  price  per 
cut,  with  the  addition  of  any  day  work  in  weaving,  gives  the  total 
cost.    To  this  must  be  added  the  expense  of 

Section  hands,      divided  in  proportion  of  looms  operated. 

Filling  carriers,         «        «  «  «  pounds  produced. 

Inspecting,  "        "  "  "  yards  produced. 

Room  girls,        j 

Sweepers,  etc.,  [•      «        «  «  «  total  or  other  weaving  costs. 

Overseeing,        J 

Of  course  any  of  these  expenses  may  be  assigned  to  any  mark 
of  goods,  if  by  reason  of  peculiar  circumstances  it  can  be  definitely 
placed,  but  the  above  seems  the  most  reasonable  rule,  ordinarily. 

The  division  of  the  labor  of  finishing  is  very  difficult,  as  many 
of  the  employees  in  this  department  spend  their  time  handling  a 
variety  of  goods,  or  working  by  turns  at  different  tasks.  There 
are,  also,  many  minor  operations  involving  slight  expense,  so 
that  the  labor  necessary  to  subdivide  the  labor  seems  trivial. 

In  the  mill  which  we  are  stud3dng  the  finishing  department  has 

the  conduct  of  the  following  operations :  — 

Trimming,  brushing  and  measuring,  di\aded  per  yards  passed. 

Sewing,  divided  per  pieces  woven  and  sewn. 

Tentering,  divided  per  yards  goods  receiving  hard  finish. 

Calendering,  divided  per  yards  goods  receiving  hard  finish. 

Folding,  divided  per  yards  goods  passed. 

Inspecting,  divided  per  yards  goods  passed. 

Winding,  divided  per  yard  goods  passed. 

Backing,  divided  per  pieces  woven. 

Pressing,  divided  per  pieces  pressed. 

Banding,  divided  per  pieces  banded. 

,..,,/    Yards  napped  X  runs    \ 

Nappmg,  divided  I I 

\  Widths  run  at  one  time.  / 

Binding,  divided  per  blankets  bound. 

Packing,  divided  per  cases  packed. 

Sample  card  making,  charged  to  kind  of  cards  made. 

In  the  dye  house  a  special  report  is  prepared  by  the  overseer, 
stating  how  much  labor  has  been  bestowed  upon  each  kind  of 
work.    This  report  is  appended  to  the  payroll  and  is  necessary 


FACTORY  STATISTICS  537 

because  the  small  amount  of  work  and  its  irregularity  render  it 
inexpedient  to  keep  the  same  men  upon  one  job. 

Some  mills  even  carry  the  division  so  far  as  to  specify  the  color 
engaged  on  when  dyeing,  and  are  thus  enabled  to  know  the  labor 
cost  of  each  shade. 

Having  disposed  of  the  cost  of  stock  and  labor  of  manufacture, 
there  remains  the  third  division  of  outlay,  commonly  known  as 

The  General  Expense 

Out  of  the  list  of  accounts  usually  kept,  we  may  select  three 
or  four  which  may  be  analyzed  by  reference  to  the  books,  or 
which  may  be  divided  on  a  reasonable  basis. 

Sizing  Materials  may  be  divided  according  to  the  pounds  of 
warp  dressed  (which  would  exclude  ply  yarns). 

Dyestuffs  may  be  divided  according  to  the  pounds  colored, 
or  a  schedule  may  be  made  up  of  the  cost  of  each  color,  and  used 
as  a  guide  to  divide  the  cost  of  material. 

Finishing  and  Packing  Materials  are  best  disposed  of  by  exam- 
ining the  charges  to  the  account,  and  laying  upon  each  kind  of 
goods  the  cost  of  the  cases,  bands,  cards,  tape,  burlaps,  rope, 
paper,  etc.,  by  the  best  knowledge  available  of  the  amount  used. 

Freight  on  Goods  should  be  separated,  and  the  amount  prepaid 
and  freight  allowances  charged  to  the  class  of  goods  for  which 
incurred.    The  same  is  true  of  storage  charges. 

The  most  important  of  the  general  expenses  are  thus  left 

untouched.     They   usually   comprise   the   following   expenses, 

which  are  kept  separate  to  varying  degrees  of  detail  in  different 

offices: —  ^ 

Fuel  for  steam,  for  power,  heat,  dyeing,  and  drying  on  dry  cans,  slashers, 

and  finishing  machinery, 

Water  power.  Taxes, 

Oil,  Insurance, 

Supplies,  Repairs  on  machinery. 

Belting,  Repairs  on  mill  building, 

Moistening  apparatus.  Furniture  and  tools, 

Watchmen,  Machinery, 

Stable  and  yard  work,  Depreciation, 

Lighting  by  gas  or  electricity.  Interest, 

Salaries  and  office  expenses,  Expenses  unclassified. 


538  BUSINESS  STATISTICS 

In  making  up  Table  H  [omitted  in  reproduction],  a  list  of  the 
machines  in  operation  is  first  made.  Idle  machinery  is  not 
included.  The  machinery  is  listed  at  its  first  cost,  including 
shafting.  The  amounts  in  this  part  of  the  table  are  used  to  deter- 
mine the  proportion  of  the  cost  of  maintenance  to  be  charged  to 
each  department.  As  this  is  charged  by  proportion  it  is  imma- 
terial whether  we  take  the  machinery  at  half  its  value,  consider 
it  on  the  average  half  worn  out,  or  take  it  at  its  full  first  cost. 
The  latter  plan  is  followed  because  simpler. 

This  equalizes  the  cost  of  insurance,  taxes,  and  watch,  so  that 
they  are  not  thrown  with  undue  weight  upon  new  machinery. 
It  also  enables  us  to  distribute  the  loss  through  depreciation. 
In  most  mills  this  is  met  by  charging  to  running  expenses  a  partial 
or  full  amount  of  the  cost  of  new  machinery,  and  not  by  a  system- 
atic reduction  of  the  machinery  on  the  inventory.  The  former 
method  is  more  elastic  and  convenient,  as  affording  an  oppor- 
tunity to  carry  forward  or  to  reduce  the  new  machinery  account, 
according  as  the  season  has  been  more  prosperous  or  less;  but  a 
systematic  charging  off,  say  of  5  per  cent  of  the  first  cost  of  each 
machine,  every  year,  if  followed  by  some  managers,  in  the  past, 
might  have  given  a  warning  of  the  condition  which  remained 
until  a  period  of  depression  revealed  it,  by  a  failure  to  meet 
adverse  circumstances. 

In  the  columns  under  buildings  and  furnishings,  we  enter  the 
floor  space  occupied  by  such  class  of  machines,  taking  it  in  such 
a  manner  as  to  cover  all  the  space  in  each  room.  [Cost  per 
square  foot  is  shown  for  elements  of  equipment.]  Separate 
columns  are  also  provided  for  piping,  heating,  wiring  for  lights, 
moistening  apparatus  whenever  it  is  installed,  automatic  sprink- 
lers, and  the  cost  of  building  construction. 

In  this  table  provision  is  also  made  for  a  statement  of  the  power 
used  in  each  department.  It  is  not  necessary  for  this  to  be 
the  exact  amount  of  power  consumed,  in  order  that  the  account 
of  it  may  come  out  even,  for  the  cost  of  power  is  divided  on  a 
percentage  basis. 

In  the  remaining  columns  the  percentage  basis  is  abandoned, 
and  actual  expense  records  take  its  place.    We  suppose  that  a 


FACTORY  STATISTICS  539 

record  is  kept  of  all  the  labor  and  iron,  or  other  material,  used 
in  repairs  in  each  department.  The  balance  remaining,  after 
deducting  their  sum  from  the  total  amount  charged  to  this 
account,  including  the  estimated  cost  of  power,  oil,  supplies, 
maintenance,  supervision,  etc.,  is  added,  for  convenience,  as  a 
percentage  of  the  ascertained  cost  in  a  third  column. 

The  same  plan  is  followed  in  the  distribution  of  the  cost  of 
supplies,  oil,  belting,  light,  roll  covering,  and  moistening.  Only 
one  column  is  used  for  each  of  these. 

The  foregoing  table  or  list  exhibits  the  details  for  arranging 
the  distribution  of  expense.  The  summaries  of  the  departments 
are  now  transferred  to  another  condensed  table,  Table  K  [omitted 
in  reproduction]. 

It  will  be  noticed  that  the  expenses  which  we  have  been  con- 
sidering pertain  to  one  or  two  sorts,  or  both,  (i)  Those  which 
relate  to  the  care  of  the  property  and  to  keeping  it  in  condition, 
by  the  repair  of  loss  through  wear  and  decay.  (2)  The  expense  of 
motive  power,  made  up  of  fuel,  engine  repairs,  interest  on  water- 
power  and  steam  plant,  labor  of  engineers,  firemen,  etc.  There 
is  something  to  be  said  for  including  the  expense  of  oil  and  belting 
with  power,  but  for  convenience  they  are  here  included  with 
maintenance. 

Table  H  is  only  a  partial  list  of  machinery,  but  Table  K  is  a 
complete  summary  of  all  departments.  In  the  second  column 
is  placed  the  value  of  machinery  in  each  department,  including 
that  of  power  and  repair  plants,  etc.  In  the  third  column  oppo- 
site this  value  is  entered  the  per  cent  which  it  bears  to  the  total 
value  of  machinery  as  found  in  the  footing  of  the  second  column. 
The  amount  paid  for  insurance,  taxes,  watch,  and  depreciation  or 
renewal,  which  is  shown  in  the  box  at  the  head  of  the  columns, 
is  then  divided  among  the  departments,  in  the  proportion  of  the 
value  of  machinery  exhibited  in  the  percentages  set  down  in  the 
third  column.  The  net  amount  thus  chargeable  to  each  depart- 
ment is  entered  in  column  4.  The  amount  set  against  power  plant 
is  then  entered  in  the  box  at  the  head  of  the  power  column  as  a 
part  of  the  cost  power.  The  same  with  repairs,  moistening, 
etc.,  which  are  entered  on  Table  H. 


540  BUSINESS  STATISTICS 

The  expense  of  maintenance  of  buildings  is  computed  after 
the  same  plan  as  machinery. 

The  expense  of  light,  oil,  repairs,  supplies,  roll  covering, 
belting,  and  humidifying  in  each  department  is  summarized 
from  Table  H  and  placed  in  column  8. 

The  expense  of  motive  power  is  then  divided  after  the  same 
manner  as  maintenance,  by  the  percentages  in  column  lo. 

The  total  expense  of  each  manufacturing  department  for  power 
and  maintenance,  including  repairs,  is  then  entered  in  column  12. 
The  expense  for  repairs  of  power  plant  is  not  so  treated,  having 
been  already  provided  for. 

The  departments  of  repair,  power,  Ught  and  moistening  are 
mutually  dependent  on  one  another.  There  are  charges  of  power 
to  repairs,  and  repairs  to  power,  and  of  both  to  moisteners.  An 
estimate  of  these  charges  must,  therefore,  first  be  made,  when  the 
work  may  proceed  as  outlined  above. 

It  will  be  noticed  that  card  room  machinery  is  twice  Hsted  in 
the  Tables  H  and  K,  which  is  to  represent  the  two  different  rooms 
in  the  plant  under  consideration. 

Having  obtained  the  total  maintenance  and  power  charges  for 
each  department,  they  may  be  transferred  so  far  as  they  apply 
to  sheets  like  Table  M,  which  represent  a  form  used  for  assem- 
bling the  costs  of  manufacture.  [On  table,  which  is  omitted, 
operations,  such  as  Picking,  Carding- Warp,  Carding-Filling,  are 
listed  vertically.  Columns  are  provided  for: — Labor,  (i)  Cost  of 
all  similar  work,  (2)  Proportion  on  Flannel  Check,  (3)  Cost  on  Flan- 
nel Check;  Maintenance  and  Power,  (i)  Cost  of  all  similar  work, 
(2)  Proportion  on  Flannel  Check;  Total  Amount;  Cost  per 
POUND  OF  Cloth.  To  the  total  for  these  costs  is  added  cost 
of  Sizing  Materials,  Dyes,  Finishing  Materials,  Freight  on  Goods, 
per  cent  for  Administration  expenses,  per  cent  for  Miscellaneous 
expenses,  cost  of  cotton  and  yam  purchased,  per  cent  for 
Interest,  per  cent  for  Profit.  The  final  entries  are  Total  Cost 
and  Cost  per  Yard.]  One  of  these  blanks  is  used  for  each  kind  of 
goods  on  which  it  is  wished  to  obtain  the  cost.  And  when  the  cost 
of  all  the  varieties  is  found,  the  sum  of  all  should  equal  the  total 
expense  for  the  period.    This  sheet  is  for  colored  flannel  check, 


FACTORY  STATISTICS  54I 

but  there  are  spaces  for  expenses  not  incurred  in  flannel  check, 
but  necessary  in  the  use  of  the  same  forms  in  other  goods. 

Besides  the  sources  of  outlay  which  we  have  already  consid- 
ered, there  remain  administration  expenses  which  include  all 
office  expenses,  salaries  of  general  executive  officers,  etc.  There 
are  always  numerous  expenses  which  are  difficult  to  classify, 
because  they  apply  to  no  particular  department,  or  are  so  small 
in  amount  as  not  to  call  for  a  separate  account.  For  instance, 
teaming  and  yard  work,  after  having  been  charged  to  departments 
as  far  as  practicable,  leaves  a  balance  which  it  is  impossible  to 
classify. 

These  may  now  be  added  to  the  cost  of  labor  and  maintenance 
in  the  same  percentage  as  the  sum  of  all  such  expenses  bears  to  all 
labor  and  maintenance,  etc.  So  far  as  we  may  discover  any  prin- 
ciple applying  to  the  division  of  these  expenses,  they  should  be 
borne  by  each  mark  of  goods,  in  inverse  proportion  to  the  rate  of 
production.  If  one  grade  of  goods  can  be  woven,  or  one  number 
of  yarn  spun  much  more  rapidly  than  another,  it  should  bear  a 
proportionately  lesser  rate  of  the  general  expenses  per  pound. 

In  a  mill  producing  goods  under  such  diverse  conditions,  it  is 
impossible  to  take  either  the  loom  or  the  spindle  as  the  basis  of 
production,  as  some  cloths  are  made  of  purchased  yarn  and  other 
very  different  yarns  are  sold  and  not  woven.  But  this  exact  result 
is  yet  more  equitably  accomplished  in  the  manner  stated,  for  not 
only  is  the  production  of  the  loom  a  factor,  but  the  production  of 
the  spindles  also. 

It  will  be  noticed  that  these  expenses  are  added  before  the 
inclusion  of  the  cost  of  material.  The  cost  of  stock  is  next  entered 
in  the  spaces  provided,  and  we  have  obtained  the  total  manu- 
facturing cost. 

It  is  sometimes  the  case  that  in  one  class  of  goods  there  will  be 
various  styles  or  patterns  differing  in  organization. 

For  instance:  there  might  be  a  Hne  of  blankets  made  of  the 
same  yarns,  woven  on  the  same  looms  and  yet  of  various  picks, 
widths,  lengths,  and  weights.  Or  there  might  be  goods  having 
gauze  leno  and  corded  effects  with  different  figures  and  ply 
yarns. 


542  BUSINESS  STATISTICS 

These  may  be  classed  together  as  one  grade  of  goods  in  some 
of  the  stages  of  cost  finding  but  a  separate  account  may  be  kept 
of  the  operations  of  warping,  weaving  or  whatever  else  desired. 

There  yet  remain  interest,  profit  and  commissions. ^  The  first 
is  added  as  a  percentage  of  the  manufacturing  cost. 

It  is  of  course  understood  that  profit  is  a  matter  governed 
entirely  by  circumstances,  and  one  which  cannot  be  regulated 
at  will  nor  by  any  arbitrary  rule.  Nevertheless,  so  long  as  busi- 
ness is  carried  on  for  profit  and  not  for  pleasure,  so  long  dividend 
accounts  may  be  legitimately  included  as  a  portion  of  the  cost 
of  manufacture.  Attention  is  called  to  the  fact  that  the  percent- 
age to  be  added  for  a  reasonable  dividend  should  be  based  not  on 
the  full  cost  of  the  goods,  but  on  the  cost  of  labor  and  mainte- 
nance. A  percentage  of  the  selling  price,  which  might  seem 
reasonable,  might  also  be  higher  or  lower  than  necessary  for  fair 
profit,  according  to  the  production  possible  on  that  same  kind 
of  goods.  Of  two  marks  of  goods  which  have  the  same  cost  to 
the  mill,  a  profit  of  5  per  cent  of  the  selling  price  on  one  might 
yield  as  much  as  10  per  cent  on  the  other,  if  the  character 
were  such  that  the  same  machinery  could  produce  double  the 
amount.  The  fact  is  more  fully  illustrated  where  the  two 
objects  of  manufacture  are  entirely  dissimilar.  It  was  stated 
some  years  ago,  by  the  Commissioner  of  Labor  of  Massachusetts, 
that  a  profit  of  4J  per  cent  on  the  selling  price  of  boots  or  shoes 
would  be  equivalent  to  14  per  cent  on  the  capital  invested,  while 
gas  and  residual  products  show  a  profit  of  21  per  cent  of  the  selling 
price,  but  less  than  8  per  cent  on  capital  invested. 

The  last  item  to  be  added  is  the  commission  for  selling  goods. 

In  reviewing  this  method,  the  first  impression  will  doubtless 
be  that  it  entails  a  great  amount  of  labor,  but  this  is  always  the 
case  where  so  much  detail  is  necessary,  and  there  seems  to  be 
reason  for  the  belief  that  the  labor,  after  this  plan,  is  no  greater 
than  in  others  giving  equally  certain  results.  In  fact  a  large 
portion  of  the  work  may  be  done  before  the  accounts  are 
closed. 

^  With  this  statement  regarding  interest,  profit  and  dividends  I  cannot  agree. 
Interest  is  an  expense  to  be  included  but  profit  is  not  expense.    [Editor.] 


FACTORY  STATISTICS  543 

As  remarked  in  the  beginning,  the  data  used  in  this  method 
of  finding  costs  are  largely  required  for  other  purposes,  and  if 
care  be  taken  to  formulate  them  aright,  they  may  be  found 
ready  at  hand.  Carefully  followed  out  and  intelligently  used  this 
method  will  give  the  most  accurate  results.  By  this  method  the 
labor  is  thrown  more  upon  the  head  office  and  less  upon  depart- 
ments. It  is  therefore  well  suited  to  those  mills  which  employ 
a  cost  clerk  for  the  purpose  of  making  estimates  of  past  and 
prospective  products. 

XV.  The  Relation  between  Production  and  Costs  ^ 

By  H.  L.  Gantt 

Manufacturers  in  general  recognize  the  vital  importance  of  a 
knowledge  of  the  cost  of  their  product,  yet  but  few  of  them  have  a 
cost  system  on  which  they  are  willing  to  rely  under  all  conditions. 

While  it  is  possible  to  acquire  quite  accurately  the  amount  of 
material  and  labor  used  directly  in  the  production  of  an  article, 
and  several  systems  have  been  devised  which  accomplish  this 
result,  there  does  not  yet  seem  to  have  been  devised  any  system 
of  distributing  that  portion  of  the  expense,  known  variously  as 
indirect  expense,  burden  or  overhead,  in  such  a  manner  as  to 
make  us  have  any  real  confidence  that  it  has  been  done  properly.' 

There  are  in  common  use  several  methods  of  distributing  this 
expense.  One  is  to  distribute  the  total  indirect  expense,  including 
interest,  taxes,  insurance,  etc.,  according  to  the  direct  labor. 
Another  is  to  distribute  a  portion  of  this  expense  according  to 
direct  labor,  and  a  portion  according  to  machine  hours.  Other 
methods  distribute  a  certain  amount  of  this  expense  on  the 
material  used,  etc.  Most  of  these  methods  contemplate  the  dis- 
tribution of  all  of  the  indirect  expense  of  the  manufacturing  plant, 
however  much  it  may  be,  on  the  output  produced,  no  matter  how 
small  it  is. 

If  the  factory  is  running  at  its  full,  or  normal,  capacity,  this 
item  of  indirect  expense  per  imit  of  product  is  usually  small.    If 

1  Journal  of  the  American  Society  of  Mechanical  Engineers,  vol.  37,  pp.  466-468. 
Reprinted  by  permission  of  American  Society  of  Mechanical  Engineers. 


544  BUSINESS  STATISTICS 

the  factory  is  running  at  only  a  fraction  of  its  capacity,  say  one- 
half,  and  turning  out  only  one-half  of  its  normal  product,  there  is 
but  little  change  in  the  total  amount  of  this  indirect  expense,  all 
of  which  must  now  be  distributed  over  half  as  much  product  as 
previously,  each  unit  of  product  thereby  being  obliged  to  bear 
approximately  twice  as  much  expense  as  previously. 

When  times  are  good,  and  there  is  plenty  of  business,  this 
method  of  accounting  indicates  that  our  costs  are  low;  but  when 
times  become  bad  and  business  is  slack,  it  indicates  high  costs  due 
to  the  increased  proportion  of  burden  each  unit  has  to  bear. 
During  good  times,  when  there  is  a  demand  for  all  the  products  we 
can  make,  it  is  usually  sold  at  a  high  price  and  the  element  of  cost 
is  not  such  an  important  factor.  When  business  is  dull,  however, 
we  cannot  get  such  a  high  price  for  our  product,  and  the  question 
of  how  low  a  price  we  can  afford  to  sell  the  product  at  is  of  vital 
importance.  Our  cost  systems,  as  generally  operated  at  present, 
show  under  such  conditions  that  our  costs  are  high  and,  if  busi- 
ness is  very  bad,  they  usually  show  us  a  cost  far  greater  than  the 
amount  we  can  get  for  the  goods.  In  other  words,  our  present 
systems  of  cost  accounting  go  to  pieces  when  they  are  most 
needed.  This  being  the  case,  many  of  us  have  felt  for  a  long  time 
that  there  was  something  radically  wrong  with  the  present 
theories  on  the  subject. 

As  an  illustration,  I  may  cite  a  case  which  recently  came  to  my 
attention.  A  man  found  that  his  cost  on  a  certain  article  was 
thirty  cents.  When  he  found  that  he  could  buy  it  for  twenty-six 
cents,  he  gave  orders  to  stop  manufacturing  and  to  buy  it,  saying 
he  did  not  imderstand  how  his  competitor  could  sell  at  that  price. 
He  seemed  to  realize  that  there  was  a  flaw  somewhere,  but  he 
could  not  locate  it.  I  then  asked  him  what  his  expense  consisted 
of.  His  reply  was  labor  ten  cents,  material  eight  cents,  and  over- 
head twelve  cents.  My  next  question  was :  Are  you  running  your 
factory  at  full  capacity  ?  I  got  the  reply  that  he  was  running  it 
at  less  than  half  its  capacity,  possibly  at  one-third.  The  next 
question  was :  What  would  be  the  overhead  on  this  article  if  your 
factory  were  running  full  ?  The  reply  was  that  it  would  be  about 
&ve  cents;  hence  the  cost  would  be  only  twenty-three  cents. 


FACTORY  STATISTICS  545 

The  possibility  that  his  competitor  was  running  his  factory  full 
suggested  itself  at  once  as  an  explanation. 

The  next  question  that  suggested  itself  was  how  the  twelve 
cents  overhead,  which  was  charged  to  this  article,  would  be  paid 
if  the  article  was  bought.  The  obvious  answer  was  that  it  would 
have  to  be  distributed  over  the  product  still  being  made,  and 
would  thereby  increase  its  cost.  In  such  a  case  it  would  probably 
be  found  that  some  other  article  was  costing  more  than  it  could 
be  bought  for;  and,  if  the  same  policy  were  pursued,  the  second 
article  should  be  bought,  which  would  cause  the  remaining  prod- 
uct to  bear  a  still  higher  expense  rate. 

If  this  policy  were  carried  to  its  logical  conclusion,  the  manu- 
facturer would  be  buying  everything  before  long,  and  be  obliged 
to  give  up  manufacturing  entirely. 

The  illustration  which  I  have  cited  is  not  an  isolated  case,  but 
is  representative  of  the  problems  before  a  large  class  of  manu- 
facturers, who  believe  that  all  of  the  expense,  however  large,  must 
be  carried  by  the  output  produced,  however  small. 

This  theory  of  expense  distribution  is  quite  widespread,  and 
clearly  indicates  a  policy,  which  in  dull  times  would,  if  fol- 
lowed logically,  put  many  of  our  manufacturers  out  of  busi- 
ness. In  1897  the  plant  of  which  I  was  superintendent  was  put 
out  of  business  by  just  this  kind  of  logic.  It  never  started 
up  again. 

Fortunately  for  the  country,  American  people  as  a  whole  will 
finally  discard  theories  which  conflict  with  common  sense;  and, 
when  their  cost  figures  indicate  an  absurd  conclusion,  most  of 
them  will  repudiate  the  figures.  A  cost  system,  however,  which 
fails  us  when  we  need  it  most,  is  of  but  Httle  value  and  it  is 
imperative  for  us  to  devise  a  theory  of  costs  that  will  not  fail  us. 

Most  of  the  cost  systems  in  use,  and  the  theories  on  which  they 
are  based,  have  been  devised  by  accountants  for  the  benefit  of 
financiers,  whose  aim  has  been  to  criticize  the  factory  and  to  make 
it  responsible  for  all  the  shortcomings  of  the  business.  In  this 
they  have  succeeded  admirably,  largely  because  the  methods 
used  are  not  so  devised  as  to  enable  the  superintendent  to  present 
his  side  of  the  case. 


546  BUSINESS  STATISTICS 

Our  theory  of  cost  keeping  is  that  one  of  its  prime  functions  is 
to  enable  the  superintendent  to  know  whether  or  not  he  is  doing 
the  work  he  is  responsible  for  as  economically  as  possible,  which 
function  is  ignored  in  the  majority  of  the  cost  systems  now  in 
general  use.  Many  accountants,  who  make  an  attempt  to  show 
it,  are  so  long  in  getting  their  figures  in  shape  that  they  are  prac- 
tically worthless  for  the  purpose  intended,  the  possibility  of 
using  them  having  passed. 

In  order  to  get  a  correct  view  of  the  subject  we  must  look  at  the 
matter  from  a  different  and  broader  standpoint.  The  following 
illustration  seems  to  put  the  subject  in  its  true  light :  — 

Let  us  suppose  that  a  manufacturer  owns  three  identical  plants, 
of  an  economical  operating  size,  manufacturing  the  same  article, 
—  one  located  in  Albany,  one  in  Buffalo  and  one  in  Chicago,  — 
and  that  they  are  all  running  at  their  normal  capacity  and 
managed  equally  well.  The  amount  of  indirect  expense  per  unit 
of  product  would  be  substantially  the  same  in  each  of  these  fac- 
tories, as  would  be  the  total  cost.  Now  suppose  that  business 
suddenly  falls  off  to  one-third  of  its  previous  amount  and  that  the 
manufacturer  shuts  down  the  plants  in  Albany  and  Buffalo,  and 
continues  to  run  the  one  in  Chicago  exactly  as  it  has  been  run 
before.  The  product  from  the  Chicago  plant  would  have  the 
same  cost  that  it  previously  had,  but  the  expense  of  carrying  two 
idle  factories  might  be  so  great  as  to  take  all  the  profits  out  of  the 
business;  in  other  words,  the  profit  made  from  the  Chicago  plant 
might  be  offset  entirely  by  the  loss  made  by  the  Albany  and 
Buffalo  plants. 

If  these  plants,  instead  of  being  in  different  cities,  were  located 
in  the  same  city,  a  similar  condition  might  also  exist  in  which 
the  expense  of  the  two  idle  plants  would  be  such  a  drain  on 
the  business  that  they  would  offset  the  profit  made  in  the  going 
plant. 

Instead  of  considering  these  three  factories  to  be  in  different 
parts  of  one  city,  they  might  be  considered  as  being  within  the 
same  yard,  which  would  not  change  the  conditions.  Finally,  we 
might  consider  that  the  walls  between  these  factories  were  taken 
down  and  that  the  three  factories  were  turned  into  one  plant,  the 


FACTORY  STATISTICS  547 

output  of  which  had  been  reduced  to  one-third  of  its  normal 
volume.  Arguing  as  before,  it  would  be  proper  to  charge  to  this 
product  only  one-third  of  the  indirect  expense  charged  when  the 
factory  was  running  full. 

If  the  above  argument  is  correct,  we  may  state  the  following 
general  principle :  the  indirect  expense  chargeable  to  the  output 
of  a  factory  bears  the  same  ratio  to  the  indirect  expense  necessary 
to  run  the  factory  at  normal  capacity,  as  the  output  in  question 
bears  to  the  normal  output  of  the  factory. 

This  theory  of  expense  distribution,  which  was  forced  upon  us 
by  the  abrupt  change  in  conditions  brought  on  by  the  war, 
explains  many  things  which  were  inexplicable  under  the  older 
theory,  and  gives  the  manufacturer  uniform  costs  as  long  as  the 
methods  of  manufacture  do  not  change. 

Under  this  method  of  distributing  expense  there  will  be  a 
certain  amount  of  undistributed  expense  remaining  whenever 
the  factory  runs  below  its  normal  capacity.  A  careful  considera- 
tion of  this  item  will  show  that  it  is  not  chargeable  to  the  product 
made,  but  is  a  business  expense  incurred  on  account  of  our  main- 
taining a  certain  portion  of  the  factory  idle,  and  chargeable  to 
profit  and  loss.  Many  manufacturers  have  made  money  in  a 
small  plant,  then  built  a  large  plant  and  lost  money  for  years 
afterwards,  without  quite  understanding  how  it  happened.  This 
method  of  figuring  gives  a  clear  explanation  of  that  fact  and 
warns  us  to  do  everything  possible  to  increase  the  efficiency  of  the 
plant  we  have,  rather  than  to  increase  its  size. 

This  theory  seems  to  give  a  satisfactory  answer  to  all  the  ques- 
tions of  cost  that  I  have  been  able  to  apply  it  to,  and  during  the 
past  few  months  I  have  laid  it  before  a  great  many  capable  busi- 
ness men  and  accountants.  Some  admitted  that  this  viewpoint 
would  produce  a  very  radical  change  in  their  business  policy,  and 
are  already  preparing  to  carry  out  the  new  policy. 

It  explains  clearly  why  some  of  our  large  combinations  of  manu- 
facturing plants  have  not  been  as  successful  as  was  anticipated, 
and  why  the  small,  but  newer  plant,  is  able  to  compete  success- 
fully and  make  money,  while  the  combinations  are  only  just 
holding  their  own. 


S48  BUSINESS  STATISTICS 

The  idea  so  prevalent  a  few  years  ago,  that  in  the  industrial 
world  money  is  the  most  powerful  factor,  and  that  if  we  only  had 
enough  money  nothing  else  would  matter  very  much,  is  beginning 
to  lose  its  force,  for  it  is  becoming  clear  that  the  size  of  a  business 
is  not  so  important  as  the  policy  by  which  it  is  directed.  If  we 
base  our  policy  on  the  idea  that  the  cost  of  an  article  can  only 
legitimately  include  the  expense  necessarily  incurred  either 
directly  or  indirectly  in  producing  it,  we  shall  find  that  our  costs 
are  much  lower  than  we  thought,  and  that  we  can  do  many  things 
which  under  the  old  method  of  figuring  appeared  suicidal. 

The  view  of  costs  so  largely  held,  namely,  that  the  product  of  a 
factory,  however  small,  must  bear  the  total  expense,  however 
large,  is  responsible  for  much  of  the  confusion  about  costs  and 
hence  leads  to  unsound  business  policies. 

If  we  accept  the  view  that  the  article  produced  shall  bear  only 
that  portion  of  the  indirect  expense  needed  to  produce  it,  our 
costs  will  not  only  become  lower,  but  relatively  far  more  constant, 
for  the  most  variable  factor  in  the  cost  of  an  article  under  the 
usual  system  of  accounting  has  been  the  "  overhead,"  which  has 
varied  almost  inversely  as  the  amount  of  the  product.  This  item 
becomes  substantially  constant  if  the  ''  overhead  "  is  figured  on 
the  normal  capacity  of  the  plant. 

Of  course  a  method  of  accounting  does  not  diminish  the 
expense,  but  it  may  show  us  where  the  expense  properly  belongs, 
and  give  us  a  more  correct  understanding  of  our  business. 

In  our  illustration  of  the  three  factories,  the  cost  in  the  Chicago 
factory  remained  constant,  but  the  expense  of  supporting  the 
Buffalo  and  Albany  factories  in  idleness  was  a  charge  against  the 
business,  and  properly  chargeable  to  profit  and  loss. 

If  we  had  loaded  this  expense  on  the  product  of  the  Chicago 
factory,  the  cost  of  the  product  would  probably  have  been  so 
great  as  to  have  prevented  our  selling  it,  and  the  total  loss  would 
have  been  greater  still. 

When  the  factories  are  distinctly  separate,  few  people  make 
such  a  mistake,  but  where  a  single  factory  is  three  times  as  large 
as  is  needed  for  the  output,  the  error  is  frequently  made,  with 
results  that  are  just  as  misleading. 


FACTORY  STATISTICS  549 

As  a  matter  of  fact  it  seems  that  the  attempt  to  make  a  product 
bear  the  expense  of  plant  not  needed  for  its  production  is  one  of 
the  most  serious  defects  in  our  industrial  system  today,  and 
farther  reaching  than  the  differences  between  employers  and 
employees. 

The  problem  that  faces  us  is  then  first  to  find  just  what  plant, 
or  part  of  a  plant,  is  needed  to  produce  a  given  output,  and  to 
determine  the  "  overhead  '^  expense  on  operating  that  plant  or 
portion  of  a  plant.  This  is  primarily  the  work  of  the  manu- 
facturer, or  engineer,  and  only  secondarily  that  of  the  accountant, 
who  must,  as  far  as  costs  are  concerned,  be  the  servant  of  the 
superintendent. 

In  the  past,  in  almost  all  cost  systems  the  amoimt  of  "  over- 
head "  to  be  charged  to  the  product,  when  it  did  not  include  all 
the  "  overhead,"  was  more  or  less  a  matter  of  judgment.  Accord- 
ing to  the  theory  now  presented,  it  is  not  a  matter  of  judgment, 
but  can  be  determined  with  an  accuracy  depending  upon  the 
knowledge  the  manufacturer  has  of  the  business. 

Following  this  Hne  of  thought  it  should  be  possible  for  a  manu- 
facturer to  calculate  just  what  plant  and  equipment  he  ought  to 
have,  and  what  the  staff  of  officers  and  workmen  should  be  to 
turn  out  a  given  profit. 

If  this  can  be  correctly  done,  the  exact  cost  of  a  product  can  be 
predicted.  Such  a  problem  cannot  be  solved  by  a  cost  accountant 
of  the  usual  type,  but  is  primarily  a  problem  for  an  engineer, 
whose  knowledge  of  materials  and  processes  is  essential  for  its 
solution. 

Having  made  an  attempt  to  solve  a  problem  of  this  type,  one 
of  the  most  important  functions  we  need  a  cost  system  to  per- 
form is  to  keep  the  superintendent  continually  advised  as  to 
how  nearly  he  is  realizing  the  ideal  set,  and  to  point  out  where 
the  shortcomings  are. 

Many  of  us  are  accustomed  to  this  viewpoint  when  we  are 
treating  individual  operations  singly,  but  few  have  as  yet  made 
an  attempt  to  consider  that  this  idea  might  be  applied  to  a  plant 
as  a  whole,  except  when  the  processes  of  manufacture  are  simple 
and  the  products  few  in  number.    When,  however,  the  processes 


550  BUSINESS  STATISTICS 

become  numerous  or  complicated,  the  necessity  for  such  a  check 
becomes  more  urgent,  and  the  cost  keeper  who  performs  this 
function  becomes  an  integral  part  of  the  manufacturing  system, 
and  acts  for  the  superintendent,  as  an  inspector,  who  keeps  him 
advised  at  all  times  of  the  quality  of  his  own  work. 

This  conception  of  the  duties  of  a  cost  keeper  does  not  at  all 
interfere  with  his  supplying  the  financier  with  the  information 
he  needs,  but  insures  that  information  shall  be  correct,  for  the 
cost  keeper  is  continually  making  a  comparison,  for  the  benefit  of 
the  superintendent,  of  what  has  been  done  with  what  should  have 
been  done.  Costs  are  valuable  only  as  comparisons,  and  com- 
parisons are  of  little  value  unless  we  have  a  standard,  which  it  is 
the  function  of  the  engineer  to  set. 

Lack  of  reliable  cost  methods  has,  in  the  past,  been  responsible 
for  much  of  the  uncertainty  so  prevalent  in  our  industrial  policies; 
but  with  a  definite  and  reliable  cost  method,  which  enables  us  to 
differentiate  between  what  is  lost  in  manufacturing  and  what  is 
lost  in  business,  it  will  usually  become  easy  to  define  clearly  the 
proper  business  policy. 


CHAPTER  V 

STATISTICAL  REPORTS  FOR  THE  CHIEF  EXECUTIVE 

Introduction 

Administrative  control  in  a  business  establishment  centers  in 
the  chief  executive,  who  may  be  the  president  of  the  company, 
the  treasurer,  the  general  manager,  the  senior  partner,  or,  in  a 
small  business,  the  proprietor.  To  the  chief  executive  is  intrusted 
the  responsibility  for  the  execution  of  policies.  He  is  expected  to 
maintain  the  essential  balance  of  departments  in  order  to  insure 
smoothness  of  operation  and  maintenance  of  quantity  and  quality 
of  product  and  quality  of  service  to  customers.  Upon  the  effec- 
tive execution  of  consistent  policies  depends  the  continued  success 
of  a  business. 

Executive  control,  to  be  effective,  must  ordinarily  be  based  in 
part  upon  a  system  of  reports  and  records  which  show  exactly 
what  is  occurring  in  each  department  and  bring  out  the  tendencies 
of  the  business  as  a  whole.  Whereas  reports  have  been  considered 
up  to  this  point  chiefly  from  the  points  of  view  of  the  superintend- 
ent, department  managers,  and  foremen  to  whom  the  super- 
vision of  the  various  departments  is  delegated,  attention  is  now 
to  be  directed  to  the  summaries  of  these  records  and  to  the 
statistical  reports  which  should  be  prepared  for  the  chief  execu- 
tive.i  Although  the  form  of  the  reports  and  the  details  included 
will,  of  course,  vary  greatly  according  to  the  nature  and  size  of 
the  business,  the  fundamental  principles  involved  in  the  prepara- 
tion of  reports  for  the  executive  are  essentially  the  same,  whether 
the  business  is  large  or  small  and  whether  it  is  a  retail  store  or  a 
manufacturing  company,  a  bank  or  an  insurance  company,  a 
railroad  or  a  telephone  company. 

In  the  first  place,  it  must  be  recognized  that  the  reports  for  the 
chief  executive  must  be  simple  and  condensed.    Too  many  or  too 

^  Financial  statements  and  cost  reports  are  not  included  here,  for  they  are  con- 
sidered as  falling  within  the  province  of  accounting  rather  than  of  statistics. 

S5I 


552  BUSINESS  STATISTICS 

elaborate  reports  are  as  bad  as  no  reports.  In  instances  where  a 
properly  selected  system  of  reports  for  the  executive  has  not  been 
worked  out  and  a  heterogeneous  mass  of  reports  is  constantly 
supplied  to  him,  it  generally  happens  that  many  of  the  reports 
receive  scant  attention.  The  executive  is  too  busy  with  other 
matters  to  spend  his  time  in  ploughing  through  a  mass  of  details 
which  could  have  been  presented  in  summary  form.  He  needs 
reports  prepared  especially  for  his  purposes.  If  these  summaries 
indicate  the  need  of  more  detailed  information  from  any  depart- 
ment, it  is  always  possible  for  the  executive  to  secure  the  detailed 
reports  and  records  from  which  the  summaries  were  prepared. 
The  summaries  for  the  chief  executive  should  enable  him  to 
detect  irregularities  which  call  for  further  explanation,  and  to 
judge  tendencies  affecting  the  business  as  a  whole.  To  the 
regular  reports  may  be  added  summaries  of  the  results  of  any 
casual  tests  or  occasional  experiments  in  which  the  executive  is 
interested. 

The  system  of  reports  for  the  chief  executive  should  provide 
for  daily  reports  of  some  items,  weekly  reports  of  others,  and 
monthly  summaries  of  others.  The  frequency  of  each  report 
must  depend  upon  its  bearing  upon  the  determination  and  execu- 
tion of  policies.  In  addition  to  the  reports  which  provide  statis- 
tics concerning  the  internal  workings  of  the  business,  external 
statistics,  especially  those  which  are  indices  of  general  business 
conditions,  are  also  required  by  the  chief  executive.  The  barom- 
eter figures  for  the  individual  business  may  be  continuously 
compared  with  other  indices  of  business  conditions,  such  as  those 
which  have  been  discussed  in  a  previous  section  of  this  book.  It 
is  not  necessary  again  to  enter  upon  this  subject  at  length. 

In  the  following  selections  a  few  illustrations  of  statistical 
reports  for  executives  are  given,  but  unfortunately  there  is  an 
even  greater  dearth  of  published  information  on  this  subject  than 
upon  sales  and  factory  statistics.  Inasmuch  as  no  specific 
example  is  given  in  the  following  selections  of  a  complete  system 
of  reports  for  a  chief  executive,  the  following  plan  is  outlined  for 
purposes  of  illustration.  A  system  of  this  sort  would  apply  to  a 
manufacturing  company,  such  as  a  shoe  factory,  textile  mill,  or 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  553 

foundry,  which  is  turning  out  standardized  products.  The  same 
general  scheme  is  applicable,  with  some  modifications,  to  other 
manufacturing  companies  and  an  analogous  scheme  would  apply 
to  a  mercantile  business  such  as  a  wholesale  house  or  a  depart- 
ment store.  These  reports  for  the  chief  executive  are,  in  the 
main,  summaries  of  the  more  detailed  reports  discussed  in  the 
preceding  sections  of  this  book. 

Daily  reports:  Orders  (number  and  value),  Production  (quan- 
tity). Shipments  (quantity  or  value),  and  Delinquent  Deliveries 
(number  and  value).  This  last  item  is  added  because  the  mere 
fact  that  it  is  being  constantly  reported  to  the  executive  will  tend 
to  have  a  salutary  effect  upon  the  whole  organization  and  help  to 
keep  the  volume  of  dehnquencies  at  a  minimum.  A  daily  record 
of  the  first  three  items  should  suffice  to  show  the  general  tend- 
encies of  the  business  from  day  to  day,  at  least  so  far  as  these 
tendencies  are  revealed  by  statistics. 

Weekly  reports:  Total  Orders  for  the  week,  Total  Orders  to 
date  (since  beginning  of  season  or  year).  Unfilled  Orders,  Total 
Production  for  week.  Total  Production  to  date.  Man-hours 
(total  and  percentage  of  normal)  or  Machine-hours  (total  and 
percentage  of  normal).  Spoiled  or  Second-grade  Product  (quan- 
tity and  percentage  of  total  production).  Two  of  these  items,  it 
is  to  be  noted,  are  totals  of  daily  figures.  For  comparative  pur- 
poses it  is  ordinarily  desirable  to  include  with  these  weekly 
reports  statistics  for  the  Total  Orders  received  during  the  corre- 
sponding week  and  the  Total  Orders  to  the  same  date  in  the 
preceding  year.  The  production  figures  may  likewise  be  com- 
pared with  the  corresponding  figures  for  the  preceding  year,  or, 
if  a  schedule  has  been  worked  out,  with  the  schedule. 

Monthly  reports:  Orders  for  each  class  of  product  (total  for 
month,  total  to  date).  Orders  by  sales  districts  (total  for  month, 
total  to  date,  and  comparison  with  quotas).  Returned  Goods, 
Production  by  departments  (total  and  percentage  of  normal). 
Materials  Used  (total  for  month  and  total  to  date),  Material  on 
Hand,  Stock  in  Process  (for  these  last  three  items  figures  should 
also  be  given  to  show  the  increase  or  decrease  over  the  preceding 
month),  and  Labor  Turnover.     For   several   of    these   items 


554  BUSINESS  STATISTICS 

statistics  should  also  be  given  for  the  corresponding  period  in  the 
preceding  year  in  order  to  facilitate  comparisons. 

The  monthly  reports  should  be  presented  in  a  form  which 
enables  the  executive  to  compare  the  results  for  one  month  with 
those  for  preceding  months.  In  many  businesses,  where  the 
demand  is  seasonal,  "  peak  loads  "  occur  regularly  in  certain 
months  and  one  of  the  problems  which  faces  the  executive  is  that 
of  lessening  the  distributing  influence  of  peak  loads  upon  his 
organization.  In  the  case  of  local  public  service  companies  the 
peak  load  is  a  matter  of  hourly  fluctuations,  and  for  such  busi- 
nesses the  problem  is  to  secure  a  more  nearly  even  load  through- 
out the  day.  With  whatever  periodicity  the  peak  occurs,  the 
success  of  a  policy  that  seeks  to  bring  about  a  readjustment  can 
be  determined  only  from  exact  records  which  permit  continuous 
comparisons. 

A  set  of  reports  such  as  is  outlined  above  will  give  an  executive 
a  knowledge  of  the  main  facts  about  his  business  so  far  as  they 
are  represented  by  statistics.  Many  of  these  statistics,  as  a 
general  rule,  can  advantageously  be  presented  in  graphic  form. 
From  these  reports  general  tendencies  should  be  revealed  and 
irregularities  detected.  The  reports  should  indicate  whence 
more  detailed  statements  can  be  obtained  for  each  period. 

Several  articles  on  statistics  utilized  in  the  administration  of 
railroad  and  other  pubHc  service  companies,  which  indicate  the 
analogous  use  of  statistics  in  various  kinds  of  business  enterprises, 
are  included  in  this  chapter.  Although  the  statistics  used  in  the 
various  departments  of  these  other  businesses  have  hardly 
been  touched  upon  in  the  preceding  chapters,  the  summaries 
here  presented  show  that  the  fundamental  principles  of  statis- 
tical theory  and  method  which  govern  sound  statistical  prac- 
tice in  mercantile  and  manufacturing  businesses  are  of  general 
application. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  555 

I,  The  Importance  of  Leadership  ^ 

By  H.  L.  Gantt 

The  great  war  in  Europe  is  making  increasingly  clear  the  supe- 
riority which  autocratic  Germany  had  over  democratic  England 
in  organizing  both  for  industrial  and  military  efficiency.  If 
democracy  is  to  compete  successfully  with  autocracy  in  the  long 
run,  it  must  develop  organizing  and  executive  methods  which 
are  at  least  equal  to  those  that  have  been  developed  by  autocratic 
Germany. 

This  war  is  teaching  us  many  lessons,  but  the  one  that  stands 
out  preeminently  is  the  necessity  for  leaders  who  not  only  know 
what  to  do,  but  how  to  do  it. 

England,  reposing  in  the  security  of  her  island  home,  and  sur- 
rounded by  waters  that  are  not  only  a  defence,  but  a  source  of 
wealth,  had  not  seen  the  necessity  for  that  leadership  which  alone 
is  capable  of  organizing  and  training  men  for  industry  and  for 
war,  and  now  finds  herself  at  a  sad  disadvantage  when  confronted 
by  a  nation  whose  main  business  for  the  last  fifty  years  has  been 
to  study  its  industrial  and  military  problems,  and  to  train  men  to 
solve  them. 

There  are  indications  that  we  would,  in  many  respects,  be  in 
the  class  with  England,  if  we  should  suddenly  find  ourselves 
confronted  with  her  problems.^ 

Feeling  secure  in  our  national  resources  and  native  ability,  we 
have  not  seen  the  need  to  study  our  problems  of  industrial  admin- 
istration from  a  scientific  standpoint  and  to  train  our  leaders 
accordingly,  for  the  reason  that  we  have  attained  great  wealth 
without  them  —  and  in  the  minds  of  many  the  attainment  of 
wealth  is  the  end  of  all  earthly  things. 

Here,  again,  the  war  comes  to  our  aid,  and  tells  us  that  in  war 
only  leadership  and  training  are  effective  against  leadership  and 
and  training,  and  that  wealth  is  useless  unless  we  have  time  and 
ability  to  mobilize  it;    so,  in  industry  we  know  that  a  proper 

1  Engineering  Magazine,  April,  1916,  pp.  1-5.  Reprinted  by  permission  of 
Engineering  Magazine. 

2  The  truth  of  this  statement  is  only  too  evident  now  that  we  are  in  the  war. 
[Editor.] 


5S6  "  BUSINESS  STATISTICS 

policy  is  of  far  more  importance  than  the  size  of  the  plant,  or  the 
amount  of  money  invested. 

It  is  imperative,  therefore,  that  our  industrial  leaders  should  be 
able  to  formulate  correct  policies,  which  must  be  based  on  fact 
and  not  on  opinion,  as  has  been  too  often  the  case  in  the  past. 
Our  industrial  leaders  must  therefore  be  able  to  distinguish 
between  an  opinion  and  a  fact.  They  should  also  be  able  to 
determine  and  use  facts,  and  thereby  anticipate  the  future  and 
provide  for  it. 

It  was  this  abihty  which  enabled  the  Germans  to  gain  such 
phenomenal  successes,  and  it  was  the  lack  of  this  abihty  on  the 
part  of  the  Allies  that  forced  them  on  the  defensive  at  nearly  all 
points;  illustrating  the  fact  that  we  can  no  longer  blindly  follow 
the  trail  of  those  who  have  gone  before  simply  because  they  were 
successful,  for  what  spelled  success  yesterday  may  spell  failure 
tomorrow. 

Our  industrial  leader  must  be  continually  acquiring  knowledge, 
and  just  as  continuously  using  it  to  correct  his  policies.  This  is 
common  engineering  practice  as  far  as  design  and  construction 
are  concerned,  but  far  from  common  where  the  operation  and 
the  direction  of  human  activities  are  concerned. 

A  realization  of  this  fact  is  the  origin  of  the  present  widespread 
interest  in  the  art  of  management,  which  is  simply  an  attempt  to 
apply  to  the  subject  of  management  the  method  which  the  lead- 
ing engineers  have  already  30  successfully  applied  to  that  of 
design.  It  is  only  natural  in  the  attempt  to  make  such  an  appli- 
cation that  the  degree  of  success  will,  at  first,  largely  depend  upon 
the  ability  and  training  of  the  engineer  undertaking  the  problem, 
but  the  day  will  come  when  the  principles  underlying  the  manag- 
ing mechanism  for  an  industry  will  be  as  clearly  defined  and  as 
well  understood  as  those  underlying  the  design  of  a  steam  engine, 
or  an  electric  generator. 

It  is  the  function  of  the  engineer  to  discover  or  develop  these 
principles.  This  is  not  an  easy  job;  for  the  human  factor  is  the 
prime  one  to  be  considered,  and  many  well-intentioned  people 
have  not  yet  learned  that  the  man  in  overalls  does  not  differ 
essentially  from  the  man  in  the  silk  shirt. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  557 

During  the  visit  of  the  American  Society  of  Mechanical 
Engineers  to  Germany  in  the  summer  of  1 913,  the  high  estimation 
in  which  the  engineer  was  held  in  that  country  was  evident  on  all 
sides.  There,  he  is  looked  up  to  for  the  solution  of  all  their 
industrial  problems,  and  is  no  doubt  largely  responsible  for  the 
rapid  industrial  progress  of  that  nation.  Recognizing  the  impor- 
tance of  the  educated  engineer,  and  realizing  that  unless  he  had 
equal  rank  with  other  professional  men  he  would  not  have  the 
influence  that  he  should  have,  the  Germans  invented  the  degree 
of  Doctor  of  Engineering  and  bestowed  it  liberally,  with  the 
result  that  the  new  profession  soon  took  rank  with  the  older 
professions  in  the  estimation  of  the  people.  We  found  many  of 
the  highest  civic  positions  held  by  the  leading  engineers.  What 
could  be  more  appropriate  in  an  industrial  nation  ? 

The  results,  so  far,  of  the  great  war  have  justified  this  policy, 
and  the  sooner  we  realize  that  the  engineer  is  the  one  man  who 
has  the  proper  elementary  training  for  industrial  leadership,  the 
sooner  will  the  proper  methods  of  developing  our  industries  be 
determined. 

We  claim  to  be  an  industrial  nation.  I  feel  we  are  only  just 
beginning  to  be  an  industrial  nation,  and  shall  not  be  fully  entitled 
to  that  name  until  we  have  a  complete  knowledge  of  the  principles 
on  which  successful  industry  is  based. 

Too  many  of  our  enterprises  are  still  founded  on  what  has  been^^' 
done  rather  than  on  what  can  be  done.     The  real  industrial 
leader  must  be  guided  by  future  possibilities  rather  than  past 
performances. 

So  far,  the  training  of  executives  in  democratic  countries  has 
been  left  largely  to  chance,  and  in  few  cases  have  the  principles 
by  which  successful  executives  must  be  guided  been  even  vaguely 
comprehended.  If  democracy  is  to  survive  in  the  competition 
with  highly  developed  autocratic  methods,  these  principles  must 
be  understood  and  the  essential  qualities  of  leadership  incul- 
cated. 

The  widespread  attempt  of  people  to  abolish  special  privilege 
will  be  successful  only  when  the  efficiency  of  those  making  the 
attempt  is  greater  than  the  efficiency  of  those  opposing  it. 


558  BUSINESS  STATISTICS 

If  we  would  accomplish  this  desirable  object  we  must  consider 
in  detail  the  important  elements  that  enter  into  it.  Under  a  few 
headings  I  have  pointed  out  the  subjects  that  must  first  be  given 
attention. 

Opinions  and  Fads.  First,  let  it  be  said  that  the  object  of  all 
advanced  manufacturing  methods  is  to  base  actions  on  knowledge, 
and,  as  far  as  possible,  eUminate  opinion  as  a  guide.  In  other 
words,  the  Committee,  or  Debating  Society  method  is,  under  the 
best  manufacturing  methods,  rapidly  giving  way  to  scientific 
investigation  as  a  means  of  obtaining  knowledge.  It  is  essential 
for  the  highest  success,  therefore,  that  the  manager  be  thoroughly 
familiar  with  the  method  of  making  a  scientific  investigation 
and  readily  capable  of  separating  opinions  from  facts. 

Old  and  New  Methods.  When  the  master  mechanic  owned  his 
little  shop  he  took  the  responsibility  for  making  improvements 
and  instructing  his  journeymen  and  apprentices.  In  our  large 
factories  of  today,  the  owner  is  too  far  removed  from  the  work  of 
the  shop  to  assume  such  responsibility,  even  if  he  were  capable 
of  doing  so,  which,  as  a  rule,  he  is  not.  What  has  he  done  to  fill 
this  gap  ?  One  portion  of  the  work,  that  of  invention  and  design, 
has  been  well  fiUed  by  the  graduates  of  our  engineering  schools. 
The  other,  that  of  increasing  the  efficiency  of  the  operation  of  his 
shop  and  the  training  of  his  employees,  he  has,  as  a  rule,  left  in  the 
hands  of  foremen  already  so  overloaded  with  routine  work  that 
they  are  usually  unablp  to  get  things  done  as  well,  or  as  cheaply, 
as  they  know  they  can  be  done. 

In  the  Httle  shop  of  the  past,  the  owner  carried  all  the  details 
of  the  business  in  his  head.  As  the  shop  became  larger  it  was 
necessary  for  him  to  delegate  some  of  his  duties  to  others,  and  the 
best  systems  of  management  of  today  are  so  designed  to  coordi- 
nate the  functions  which  have  been  delegated  in  such  manner  as 
to  make  them  as  effective  as  when  they  were  all  united  in  the  mind 
of  one  man. 

Manufacturing  System.  In  other  words,  the  manufacturing 
system  is  designed  to  take  the  place  of  the  one-man  management 
when  the  plant  has  outgrown  the  ability  of  one  man  to  know  all 
about  it.  The  manager  must  understand  thoroughly  how  to 
develop  and  operate  such  a  system. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  559 

Such  a  system  may  be  likened  to  a  man  with  a  perfect  memory 
and  an  infinite  capacity  for  work,  who  has  complete  knowledge 
of  all  the  tools  in  the  factory  and  is  familiar  with  the  best  methods 
of  using  them;  who  makes  it  his  business  to  learn  all  about  new 
methods  and  appHances  as  fast  as  they  are  developed  and  to  see 
that  they  are  efficiently  utilized  in  the  factory. 

To  inaugurate  such  a  system  we  should  have  in  the  manufactur- 
ing office  a  complete  knowledge  of  the  shop  equipment,  a  running 
balance  of  stores  and  of  finished  parts,  and  means  for  knowing  at 
all  times  the  exact  load  on  the  shop  and  how  each  detail  part  of  it 
is  being  handled. 

Such  an  office  must  receive  all  orders  for  the  work  to  be  done, 
and  issue  detailed  instructions  to  the  different  departments, 
checking  up  each  day  the  work  that  was  done  the  day  previous. 
In  order  to  do  this  satisfactorily,  it  must  contain  all  the  informa- 
tion regarding  the  tools  and  appliances  that  the  various  foremen 
usually  carry  in  their  heads.  If  we  know  what  is  to  be  done  and 
the  means  available  for  doing  it,  it  is  possible  to  plan  the  work  in 
advance,  but  it  isn't  easy.  Proper  planning,  with  returns  each 
day  to  tell  us  how  our  plans  are  being  carried  out,  is  a  far  more 
effective  method  of  reducing  costs  than  the  post  mortem  informa- 
tion furnished  by  a  cost  system,  provided  the  superintendent 
makes  full  use  of  the  information.  If  he  has  not  the  ability  to 
plan  and  to  lead,  he  will  get  but  little  benefit  from  this  system, 
which  is  designed  to  enable  the  capable  man  to  exert  a  larger 
influence  in  leading  and  directing. 

One  of  the  great  obstacles  in  the  way  of  introducing  these 
methods  is  that  they  require  that  every  man  shall  bear  his  own 
burdens.  If  the  position  calls  for  a  leader,  the  man  filling  it  must 
lead,  he  cannot  simply  "  hold  '*  his  job,  as  is  too  often  the  case 
under  the  older  systems. 

Principles.  We  might,  as  has  been  done  by  others,  enumerate 
several  principles  on  which  successful  management  is  based;  but, 
if  we  confine  ourselves  to  one  cardinal  principle,  the  acceptance 
of  which  seems  to  compel  the  acceptance  of  the  others,  we  may  be 
able  to  impress  our  readers  with  its  importance.  Such  a  principle 
is:  The  Authority  to  issue  an  Order  involves  the  Respon- 
sibility TO  see  that  it  is  Properly  Executed. 


S6o  BUSINESS  STATISTICS 

This  one  sentence  can  be  made  the  subject  of  a  long  essay. 
Adherence  to  this  principle  eliminates  that  class  of  managers, 
unfortunately  too  common,  who  like  to  shift  the  responsibility 
for  their  errors  to  their  subordinates.  By  the  eKmination  of  such 
men,  authority  gravitates  slowly,  but  surely,  to  those  with 
knowledge,  and  we  finally  have  a  condition  in  which  authority 
is  based  on  knowledge  and  ability  to  use  that  knowledge. 

The  most  important  corollary  to  the  above  principle  is,  that  a 
man  given  an  order  is  expected  to  carry  it  out,  and  is  thereby 
given  the  authority  to  remove  any  obstacle  he  may  find  in  his 
way. 

In  other  words,  orders  are  given  to  accomplish  results,  and  they 
should  be  given  only  when  the  results  are  possible;  in  such  a  case 
no  excuse  for  failure  should  be  accepted. 

It  cannot  be  too  strongly  emphasized  that  the  one  object  of  a 
factory  is  production,  and  that  all  other  factors  are  secondary. 

So  far,  our  colleges  and  our  training  schools  have  failed  to 
impress  this  fact  sufficiently  on  thfeir  students,  and  have  too  often 
contented  themselves  with  imparting  technical  knowledge  and 
skill.  To  use  that  knowledge  and  technical  skill  to  produce 
economically  is  a  far  more  difficult  subject  to  teach,  but  it  is  the 
one  that  is  pressing  for  comprehension. 

Cosls  and  Expenses.  There  is  a  haziness  in  the  minds  of  many 
people  as  to  the  difference  between  costs  and  expenses.  Some 
people  claim  that  all  expenses  incurred  in  accompHshing  an  object 
should  be  included  in  the  cost  of  doing  it,  regardless  of  the  fact 
as  to  whether  they  contributed  to  the  end  desired  or  not. 

Is  it  not  time  that  we  separated  the  necessary  expenses  from 
the  unnecessary  ones,  calling  the  former  the  cost,  and  the  latter 
by  some  other  name  ? 

In  any  enterprise,  money  wasted  by  misdirected  energy,  or  by 
improper  policy,  is  not  a  legitimate  charge  on  the  enterprise,  but 
should  be  charged  directly  to  the  management  as  a  loss.  Hereto- 
fore, such  waste  has  been  included  in  the  cost  of  the  enterprise, 
the  blame  for  the  excessive  cost  of  which  has  too  often  been  laid 
on  those  carrying  out  vague  instructions,  and  whose  actions  have 
been  governed  largely  by  improper  policies  of  their  superiors. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  56 1 

As  long  as  we  adhere  to  the  old  method,  and  include  in  the  cost 
of  doing  work  the  expense  of  energy  wasted  by  improper  direc- 
tion, we  shall  be  unable  to  place  blame  for  failure  where  it  belongs. 
The  newer  cost  ideas  separate  these  two  classes  of  expense,  and 
give  us  a  measure  of  managerial  efficiency,  which  has  been  largely 
lost  sight  of  in  the  past,  as  well  as  of  operating  efficiency,  which 
has  been  in  the  limelight  for  several  years. 

The  argument  against  this  is  that  "it  can't  be  done";  the 
answer  is,  "  it  is  being  done." 

Leadership.  All  great  movements,  whether  for  good  or  for 
evil,  originate  in  the  mind  of  some  leader,  and  so  important  is  this 
man  that  these  movements  are  often  known  for  thousands  of 
years  by  his  name.  Christianity,  Mohammedanism,  and  the 
other  great  religions  of  the  world  bear  testimony  to  this  fact. 

All  great  inventions  and  enterprises  not  only  have  their  origin 
in  the  mind  of  some  leader,  but  they  must  be  carried  out  under 
competent  leadership.  There  is  no  factor  that  comes  to  the  front 
at  so  many  points  as  leadership;  for  it  is  not  only  the  man  who 
conceives  the  idea  of  an  enterprise  that  must  be  a  leader,  but  so 
must  be  all  of  those  under  him  who  have  to  direct  the  activities 
of  other  men.  The  manager,  the  superintendent,  and  the  fore- 
man must  all  be  leaders  if  they  would  get  the  best  results.  This 
is  true  all  over  the  world,  but  more  especially  in  America,  where 
every  man  has  a  right,  so  long  as  he  conforms  to  the  laws  of  the 
state,  to  do  that  which  serves  his  interest  best. 

If,  therefore,  we  would  stand  at  the  head  in  industry,  we  must 
develop  such  methods  of  training  our  leaders  as  will  enable  them 
to  command  the  confidence  and  support  of  the  men  with  whom 
they  have  to  deal. 

This  subject  has  been  given  but  little  attention  in  the  past,  and 
in  consequence  our  leaders  have  been  largely  selected  at  random, 
with  the  result  that  there  are  in  this  country  no  generally  accepted 
principles  of  industrialism  along  the  Hnes  of  which  advancement 
can  best  be  made. 

Not  until  we  have  determined  the  principles  on  which  indus- 
trial development  must  be  based,  and  accepted  the  lines  along 
which  our  leaders  must  be  trained,  can  we  expect  any  harmonious 


562  BUSINESS  STATISTICS 

development.  The  great  war  now  being  waged  in  Europe  has 
enabled  us  to  contrast  a  great  nation  where  industries  were  thus 
harmoniously  developed  with  one  whose  industries  have  been 
developed  in  the  haphazard  manner  which  we  seem  to  cherish  so 
highly. 

This  war  is  destined  to  be  the  most  far  reaching  event  that  has 
taken  place  since  the  fall  of  the  Roman  Empire,  and  many 
methods  which  were  in  vogue  when  it  began  will  be  as  obsolete 
when  it  ends  as  the  dodo. 

If  we  would  keep  our  place  in  the  new  world,  which  is  to  be 
created  by  this  war,  we  must  learn  our  lesson  as  it  progresses,  and 
train  our  people  accordingly. 

II.  The  Hardest  Question  in  Business  ^ 
By  Carroll  D.  Murphy 

"  That's  the  hardest  question  in  business,"  exclaimed  one  of  the 
half-dozen  managers  of  distinguished  enterprises  recently  asked 
to  list  the  vital  factors  of  control  in  an  organization  —  to  take 
apart  the  enterprises  they  have  brought  to  success,  and  point  out 
the  ideas,  policies,  methods  and  results  which  seem  to  them  so 
important  that  the  chief  himself  should  have  them  under  his  eye 
and  hand. 

Varied  as  were  their  replies  —  personal,  keen,  widely  different 
in  approach  to  the  problem  —  yet  throughout  runs  this  central 
thread  of  management:  that  detail  must  be  organized  and  every- 
day results  made  automatic;  that  the  executive  must  keep  proper 
perspective;  that  a  manager's  work  is  not  to  shoulder  many  little 
tasks,  but  to  develop  men  and  systems  for  present  routine,  and 
thus  reserve  his  energies  for  the  greater  plans,  decisions  and 
initiatives  on  which  the  future  is  to  be  built. 

"  The  measure  of  a  manager's  value,"  said  Clarence  Funk, 
"is  his  ability  to  put  men  in  charge  of  his  various  departments 
who  are  stronger  men  in  their  lines  than  he  is."  "  I  expect  to  put 
in  half  of  each  day  at  the  oflSce  after  I  am  dead,"  Cyrus  K.  Curtis 
once  said,  humorously  hinting  at  the  organization  of  men  and 

*  Library  of  Business  Practice,  vol.  i,  pp.  9-24.  Reprinted  by  permission  of 
A.  W.  Shaw  Company. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  563 

detail  by  which  he  gets  things  done  present  or  absent.  "  The  im- 
portant thing,"  another  skilful  manager  often  says,  in  explaining 
his  ability  to  extend  his  oversight  throughout  a  great  business, 
"  is  to  distinguish  significant  from  trivial  detail."  "  I  won't  let 
detail  get  to  me  on  any  terms,"  replied  J.  S.  Kendall  in  explaining 
how  he  sifted  the  important  from  the  negligible.  "  The  imme- 
diate loss  from  a  small  blunder  is  insignificant  and  I  pay  certain 
employees  to  analyze  the  day's  work  of  the  concern  so  that  I  can 
stop  cumulative  losses." 

William  A.  Field's  answer  makes  the  same  point,  but  in  the 
nature  of  a  warning  to  employees  who  aspire  to  managerial 
places.  "  Young  men,"  he  said,  "  try  to  handle  too  much  detail 
and  are  crushed  beneath  their  load."  From  his  own  experience, 
Edward  B.  Butler  carried  further  the  same  hint  to  manager  and 
men :  "It  is  hard  to  get  a  man  to  let  go  of  detail  —  to  grow  up  into 
control  —  to  think  for  his  subordinates  who  do  not  think." 

In  his  management  John  G.  Shedd  would  subordinate  personal 
initiative  to  nothing  else.  "  Energetic  originators  in  merchandis- 
ing," said  he,  "  may  be  stifled  by  surrounding  them  too  thickly 
with  figures  and  regulations.  .  .  .  Going  beyond  a  reasonable 
limit  with  statistics  may  kill  the  Napoleons  of  business."  The 
strength  which  this  composite  initiative  —  the  enthusiasms  and 
energies  of  manager  and  men  working  together  —  gives  to  a 
business  was  neatly  brought  out  by  W.  E.  Clow:  "  I  hire  men  to 
make  me  hump." 

The  great  essentials  of  a  good  manager  are  brilliantly  sum- 
marized by  two  other  men  in  control  of  great  enterprises.  "  I 
want  executives,"  E.  A.  Filene  often  says,  "  who  can  think 
straight,  handle  men  and  buy  money  well."  "  Successful  men," 
E.  P.  Ripley  has  said,  "  have  always  known  how  to  organize, 
supervise  and  deputize." 

The  battle  with  detail  and  the  problem  of  shaping  men  to  your 
work  —  freedom  from  routine  and  sure  contact  with  essentials  — 
getting  today's  business  done  and  planning  a  secure,  progressive 
future  —  are  suggested  by  all  these  executives  as  the  essential 
aims  and  the  true  viewpoint  of  the  manager.  Closer  study  of  the 
lines  along  which  the  ambitious  employee,  the  personal  proprietor 


564  BUSINESS  STATISTICS 

and  the  corporation  executive  must  work  shows  that  the  three 
great  business  mechanisms  which  the  manager  must  control  are 
men,  money,  and  service.  According  as  different  concerns 
emphasize  one  or  another  of  these  factors  in  their  schemes  of 
management,  policies  of  executive  control  may  be  roughly  divided 
under  five  headings :  — 

(i)  Detail  Management.  Most  managers  are  driving  them- 
selves to  their  physical  Hmit  in  the  handhng  of  the  details  of  serv- 
ice, employment  and  especially  finances.  Some  executives  have 
been  Hterally  crowded  out  of  this  position  by  the  growth  of  the 
business  and  have  taken  a  stand  at  some  point  along  the  current 
of  trade,  where  by  watching  every  order,  every  credit,  every 
contract  or  expense  item,  they  can  fairly  judge  and  control  the 
business. 

(2)  Money  Management.  Many  proprietors  and  directorates 
guide  their  businesses  entirely  by  ledger  statements  and  throw 
upon  subordinates  hired  to  round  out  their  ability  all  other  mat- 
ters relating  to  the  conduct  of  the  enterprise.  In  one  case  a 
directorate  which  is  managing  a  business  entirely  as  a  matter  of 
investments  and  profits  has  never  seen  the  chain  of  stores  from 
which  its  dividends  come.  A  detail  manager  pledged  to  enthu- 
siasm by  a  generous  salary  has  authority  over  everything  except 
financial  policies.  The  disadvantages  of  this  plan  are  that  there 
is  no  proprietary  control  of  the  methods  used  in  dealing  with  the 
trade,  nor  of  the  spirit  among  the  men;  the  business  runs  at  high 
speed  but  roughly,  with  much  jarring;  and  the  management  has 
too  Httle  real  knowledge  of  conditions  to  forecast  the  future  most 
effectively. 

(3)  Leadership  Management.  Encouragement  and  the  rousing 
of  enthusiasm  among  employees  is  the  contribution  this  type 
of  manager  makes  to  his  business.  His  is  an  enterprise  that 
requires  extraordinary  initiative;  his  men  have  to  be  keyed  up 
to  the  fighting  spirit  —  they  need  the  "  flaming  torch  "  to  lead 
them.  Systematized  routine  is,  therefore,  left  to  handle  problems 
where  a  solution  has  been  found  and  a  precedent  established. 
The  management  devotes  itself  to  ''  breaking  trail  "  in  every  new 
and  difficult  path  of  the  enterprise. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  565 

(4)  Guiding  Management,  Some  managers  and  directorates 
put  their  entire  organization  as  a  tool  in  the  hands  of  their  most 
brilliant  executives,  advising  and  aiding  them  to  carry  out  for 
the  profit  of  the  concern  whatever  inspirations  promise  best  or  to 
exercise  the  particular  genius  of  each.  This  is  the  type  of  business 
where  the  manager  occupies  a  broad  field  and  insists  only  on 
dividends  rather  than  confining  his  business  to  a  definite  product 
or  service.  This  policy  is  especially  the  recourse  of  a  concern 
which  has  outgrown  one  line  —  the  big  business  viewpoint, 
where  the  manager  has  perhaps  realized  his  visions  and  depends 
on  the  inspirations  of  his  men  for  further  expansion. 

(5)  Balanced  Management.  Rockefeller's  success  is  credited 
to  the  poise  which  he  has  always  maintained  in  his  corporation. 
In  a  business  so  balanced,  neither  men,  money  nor  service  has 
undue  emphasis;  no  one  department  or  method  is  allowed  to  excel 
or  overtop  others,  but  every  part  constantly  learns  from  other 
lines,  constantly  is  kept  up  to  the  mark  and  in  proportion  with 
all  others.  This  type  of  management  combines  the  last  two  and 
rounds  out  the  incompleteness  of  all;  the  manager  is  not  only  a 
constant  inspiration  of  all  departments,  but  makes  full  use  of 
whatever  inspiration  he  can  draw  from  his  subordinates.  He 
realizes  the  necessity  of  neglecting  no  present  essential  —  neither 
men,  investment  nor  service  —  and  has  so  organized  his  method 
of  securing  reports,  making  brief  studies  in  his  various  depart- 
ments and  arousing  a  partnership  spirit  among  his  men  that  he  is 
free  to  dream  ahead  and  plan  a  greater  future  for  the  enterprise. 

Most  men  fall  short  of  managerial  success  because  they  are  one- 
sided. All  of  us  have  seen  the  proprietor  who  allows  himself  to 
be  flattered  on  his  weak  points,  equips  himself  with  subordinates 
who  duplicate  rather  than  round  out  his  abilities,  and  dodges 
haphazard  through  each  day's  detail  with  no  distinct  scheme  of 
management. 

The  problem  of  breaking  away  from  this  condition  has  been 
solved  in  a  suggestive  way  by  the  manager  of  a  real  estate  business 
that  last  year  sold  more  than  four  million  dollars'  worth  of  prop- 
erty. This  executive  recently  sat  with  a  wholesaler  in  the  latter 's 
private  office.    Ten  times  within  a  half-hour  their  talk  was  dis- 


566  BUSINESS  STATISTICS 

turbed  by  salesmen  coming  in  for  O.  K's  on  routine  credits. 
"  You  cleared  a  quarter  of  a  million  this  last  twelve  months, 
didn't  you  ?  "  the  real  estate  man  asked  his  friend.  "  Why  not 
take  six,  eight,  ten  thousand  dollars  and  hire  an  assistant  who  can 
sweep  this  detail  off  your  desk  and  let  you  get  at  the  bigger 
questions  of  your  business  ? 

"  What  subordinates  will  handle  your  task  —  what  insurance 
have  you  made  for  the  care  of  your  family's  property  —  when  you 
can  no  longer  do  this  pell  mell  day's  work  ?  One- third  of  your 
time,  if  you  will  figure  up  your  own  labor  costs  day  by  day,  is 
spent  as  nothing  but  a  routine  credit  manager." 

"  But  I  can't  find  the  men,"  protested  the  wholesaler. 

"  You  don't  know  your  men,"  was  the  answer.  "  One  of  them 
I  think  so  well  of  that  I  have  been  figuring  with  him  on  a  similar 
position  in  my  company." 

A  week  later  the  wholesaler  spent  a  half  hour  in  the  office  of  the 
real  estate  chief.  The  latter  closed  the  door,  sat  down  at  his  desk, 
reached  under  the  edge  of  it  and  touched  a  buzzer  once.  "  That 
means,"  said  he,  "  that  I  am  busy  and  do  not  wish  to  be  inter- 
rupted. I  pay  my  secretary  one  hundred  and  twenty-five  dollars 
to  know  that  now  she  is  to  take  the  numbers  of  any  telephone 
calls  for  me,  to  round  up  any  matters  I  need  to  go  over  this  eve- 
ning and  to  get  to  me  if  something  of  prime  importance  turns  up. 

^'Five  years  ago,"  he  went  on,  ''I  was  at  this  desk  until  eleven 
o'clock  every  night,  going  over  contracts  and  ledgers.  My 
business  dropped  off  because  my  selling  force  had  no  head.  Then 
I  stopped  —  took  the  time  to  analyze  my  business  and  find  what 
went  into  my  job  as  manager." 

This  actual  occurrence  throws  into  sharp  contrast  what  I  have 
called  detail  and  balanced  management.  Hundreds  of  such 
illustrations  are  at  hand  even  among  million  dollar  concerns. 
Routine-burdened  proprietors  insist  upon  O.  K'ing  every  item 
which  touches  expenses  or  a  contract,  and  thus  take  away  the 
initiative  of  their  men,  interfere  without  full  knowledge  in  depart- 
mental work  and  neglect  to  grasp  the  loose  reins  of  company 
spirit,  present  service  and  future  progress  which  lead  up  to  their 
desks. 


REPORTS  FOR  TEE  CHIEF  EXECUTIVE  567 

One  executive  has  arranged  that  no  contractual  letter  is  valid 
without  his  pencil  mark  in  the  corner.  Another  has  a  hobby  of 
picking  up  ideas  among  other  plants,  which  he  so  forces  upon  his 
department  heads  that  they  '*  make  believe  "  to  use  them  even 
when  valueless.  A  third  executive  who  is  strong  as  a  salesman 
is  constantly  interfering  on  the  artistic  side  in  the  making  of  his 
product,  although  his  judgment  on  art  is  a  joke. 

Study  of  the  work  of  high  executives  indicates  that  they  need 
a  background  of  detail  experience  and  that  in  emergencies  they 
may  have  to  handle  the  work  of  a  department,  but  that  they 
study  themselves  as  frankly  as  their  employees  and  use  their 
resources  to  hire  men  who  shall  round  out  their  own  abilities. 
Skilled  lawyers  are  constantly  at  the  service  of  department  heads 
in  order  to  guard  contracts;  and  technical  men  in  a  dozen  dif- 
ferent lines  are  kept  available  by  various  managers  who  recog- 
nize, as  Funk  has  said,  that  their  greatest  value  is  in  securing  an 
coordinating  expert  service. 

Money  management  is  an  extreme  of  this  type.  There  is  in 
New  York  a  body  of  men  whose  ability  to  manage  money  is 
drawing  dividends  from  a  score  of  middle  western  stores  into 
which  none  of  them  has  ever  stepped.  Of  buying,  of  working 
with  men,  of  planning  for  expansion  and  choosing  "  good  towns  " 
for  additional  branches,  they  know  nothing.  This  abihty  they 
have  bought  in  the  person  of  a  trusty  auditor  and  an  experienced 
superintendent.  They  have  limited  the  business  to  a  cash  basis, 
held  down  administrative  problems  to  a  minimum  and  are 
enabled  to  control  successfully  merely  by  holding  the  strings  of 
local  and  total  reports,  capital  and  surplus,  purchases,  sales  and 
expense,  profits  and  dividends.  By  comparative  and  graphic 
financial  reports,  they  are  shaping  the  future  of  a  business  in 
which  capital  is  the  big  factor.  Their  method  has  been  to  reduce 
men  and  service  to  their  lowest  terms  and  shrewdly  to  pick  out 
the  essentials  in  the  control  of  funds. 

An  entirely  different  spirit  is  behind  the  policy  of  the  manager 
who  heads  and  inspires  his  men.  He  may  have  the  other  factors, 
finance,  service,  future  plans,  well  in  hand,  but  his  biggest  duty, 
as  he  sees  it,  is  to  lead  his  men  —  to  teach  them  that  he  asks  them 


568  BUSINESS  STATISTICS 

to  go  nowhere  except  where  he  will  go  first.  He  has  worked  out  a 
course  which  his  enterprise  is  to  take,  and  in  order  to  keep  close 
to  it,  he  goes  first.  Usually  such  a  leader  comes  up  from  the 
selling  side  —  a  Chalmers,  a  Cottingham.  He  suits  the  enterprise 
where  production  is  automatic  or  routine;  where  financing  has 
been  solved;  where  the  packages  that  stream  out  to  the  shipping 
platform  crowd  the  salesmen  in  their  efforts.  When,  however,  a 
mere  field  leader  happens  in  control  of  an  intricate  producing 
machine,  his  instinct  for  fast  work,  attractive  selling  points,  and 
competition  among  men  may  lead  to  an  emphasis  on  appearance 
rather  than  quality  and  on  the  impossible  promises  of  delivery 
which  mark  the  business  that  is  out  of  balance. 

The  manager  who  guides  instead  of  leading  and  furnishing 
inspiration  for  his  enterprise  is  making  the  best  of  a  temperament 
judicial  rather  than  executive.  He  hires  department  heads  who 
are  full  of  ideas  but  perhaps  lack  the  ability  to  separate  the  good 
from  the  bad  business  propositions.  His  men  furnish  many  ideas 
and  inspirations;  he  guides  their  ambitions,  challenges  the 
visionary  enterprise  and  backs  his  workers  in  carrying  out  their 
plans. 

At  his  best,  he  attracts  to  himself  partners  or  subordinates  who 
so  round  out  one  another's  powers  as  to  make  for  extraordinary 
efficiency. 

The  directorate  of  a  great  railroad  is  said  invariably  to  follow 
this  method  in  filling  the  president's  chair.  Periodically  the 
effectiveness  of  the  system  in  all  departments  is  discussed.  The 
most  recent  executive  has  come  up  through  the  engineering  or 
operating  or  selling  department,  and  in  line  with  his  natural  bias 
has  brought  that  function  to  extraordinary  efficiency.  Striking  a 
level  throughout  the  corporation,  another  department  far  from 
his  experience  shows  at  low  ebb.  If  an  executive  can  be  found 
with  the  qualities  of  a  manager  and  with  experience  in  this  weak 
department,  he  is  elected  to  the  presidency,  and  the  business  is 
thus  made  continually  to  race  with  itself. 

In  a  similar  way,  it  is  possible  for  you  as  a  proprietor,  as  an 
executive  expectant  of  advancement,  or  as  a  member  of  a  govern- 
ing board,  to  test  your  perspective  upon  the  men,  the  capital  and 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  569 

the  service  under  your  control  so  that  no  possibility  will  be 
neglected. 

A  manager  who,  at  twenty-nine,  controls  a  half-million  dollar 
business  of  his  own,  hit  upon  the  plan  of  telling  the  department 
head  who  broaches  a  suggestion:  "  You  know  I  can't  remember 
any  of  that.  Better  put  it  down  on  paper."  This  is  more  than 
a  way  to  minimize  his  detail  work  —  it  is  a  definite  scheme  of 
management  in  its  first  essential  —  to  develop  managerial  ability 
among  subordinates.  Suggestions  now  come  to  him  on  paper, 
carefully  worked  out,  with  a  plat  of  the  location  involved,  and 
with  the  cost,  upkeep,  income,  addresses  and  all  details  in  order. 

Every  executive  knows  how  difficult  it  is  to  get  men  to  put 
cases  before  him  briefly  and  yet  so  completely  that  he  can  make  a 
clean-cut  decision  —  so  that  he  can  manage  rather  than  investi- 
gate and  administer.  This  executive  has  learned  to  insist  upon  a 
statement  that  not  only  lengthens  his  own  reach,  but  trains 
employees  to  recognize  essentials  and  to  push  secondary  control 
to  the  limits  of  their  authority. 

Further,  he  sends  his  department  heads  anywhere  from  Los 
Angeles  to  Boston  upon  hearing  of  any  concern  which  is  doing 
something  better  than  his  office  has  learned  to  do  it.  Every 
business  has  done  some  one  thing  better  than  most  others.  This 
manager  has  learned  to  go  prospecting  by  proxy  and  so  get  the 
gold  of  progress  in  many  lines.  His  own  ability  is  Hfted  upon  the 
platform  of  all  that  his  men  learn,  suggest  and  achieve. 

Seven  out  of  the  ten  well  known  managers  quoted  have  sug- 
gested the  importance  of  developing  initiative,  mental  power, 
enthusiasm  and  team  spirit  in  the  force.  This  is  characteristic 
of  the  manager  who  realizes  that  neither  detail  nor  policy  can  be 
reahzed  except  through  subordinates.  Scarcity  of  men  —  the 
time-worn  excuse  of  overworked  managers  —  often  goes  back  to 
the  chief's  neglect  of  the  men  in  his  employ. 

Detail  gets  power  over  business  executives  because  (i)  they 
cannot  separate  the  significant  from  the  non-essential,  or  (2) 
they  cannot  so  organize  as  to  get  other  than  eye  service. 

"  One  of  the  hardest  things  for  an  executive  to  learn,"  a  sage 
business  man  has  said,  "  is  that  while  his  men  are  developing,  he 


570  BUSINESS  STATISTICS 

may  expect  nothing  to  be  done  exactly  as  he  would  do  it.  He 
must  permit  mistakes  to  '  go  through  '  if  his  men  are  to  see  where 
they  have  blundered." 

Another  efficient  manager  has  a  creed  something  like  this: 
"  An  office  manager,  a  private  secretary  and  an  experienced 
lawyer  checking  over  and  summarizing  the  work  of  this  concern 
prevent  the  making  of  any  mistake  so  important  as  to  endanger 
ou;r  business.  For  lesser  mistakes  I  throw  the  responsibility  on 
my  men  and,  by  my  various  reports,  afterwards  get  at  the  blun- 
ders which  indicate  dangerous  tendencies  and  require  that  I  train 
or  correct  my  men."  This  system  of  reports  brings  out  the  rela- 
tion of  every  employee  to  finances  as  regards  sales,  expenses  and 
profit;  to  service,  as  regards  all  correspondence,  but  especially 
contracts  and  complaints;  to  new  plans  and  opportunities,  and 
to  team  spirit  and  office  discipline. 

What  he  calls  his  "  mail  analysis  "  will  illustrate  his  method. 
His  secretary  goes  through  both  the  incoming  and  the  outgoing 
mail  every  day  and  makes  a  four  o'clock  report  to  him  somewhat 
as  follows:  — 

Daily  Mail  Analysis 
Incoming  mail 

80%  routine 

10  buyers  make  various  complaints  as  to  service  rendered 

Three  misdirected  letters  returned 

Terms  offered  on  Harris  contract 

H.  F.  sends  $5,000  contract  for  signature. 

On  this  report  the  chief  checks  any  correspondence  he  wishes 
to  see.  Important  outgoing  mail  is  thus  brought  to  his  attention 
before  being  posted.  Less  important  letters  which  are  not  tact- 
fully written  will  result  in  complaints  and  thus  be  called  up  later, 
as  "  kicks  "  are  among  the  points  most  carefully  watched.  In  a 
few  minutes  he  makes  all  important  letters  safe,  and  checks  on 
the  efficiency  of  every  correspondent  and  stenographer.  A 
monthly  report  arranged  by  quotas  and  actual  totals  tells  him 
just  how  each  department's  expenses,  sales  and  profits  are 
running.    Other  details  are  similarly  sifted. 

Guessing  at  financial  trends  is  one  of  the  worst  blunders  a 
manager  can  make  —  and,  strangely,  one  of  the  most  frequent. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  57 1 

One  day  the  manager  of  the  real  estate  department  in  an  invest- 
ment company  went  to  a  successful  competitor  in  desperation  and 
asked  for  his  scheme  of  accounting.  The  real  estate  department 
was  one  of  three  subdivisions  of  the  business  which,  taken  to- 
gether, had  shown  a  fair  profit.  "  I'll  wager,"  said  the  competitor, 
''  that  your  department  has  not  made  a  dollar  in  three  years." 

Analysis  along  the  lines  of  sound  cost  keeping  proved  that 
in  thirty-five  months,  with  an  investment  of  $1,500,000,  the 
department  had  lost  $200 ! 

Money  is  never  still.  It  is  always  either  coming  or  going; 
growing  or  wasting  away.  Your  desk  of  control  is  ill-equipped 
unless  to  it  come  daily,  monthly  and  annual  reports  which  tell 
you  in  itemized  detail,  with  whatever  quotas,  comparisons  and 
percentage  parallels  are  most  helpful,  your  cost  of  doing  business, 
the  relative  parts  in  that  cost  which  men,  material  and  other 
factors  play,  your  various  lines  listed  in  order  of  greatest  per  cent 
and  total  profit,  your  income,  your  turnover,  your  investment, 
your  depreciation,  your  quick  assets  and  liabilities,  your  collec- 
tions and  reserves,  your  profit  or  loss. 

Every  business,  moreover,  has  some  factor  which  is  as  sensitive 
as  a  barometer  in  reflecting  current  conditions.  You  need  to  find 
and  watch  this  essential  constantly.  Credits,  collections,  over- 
head, trend  of  buying,  raw  material  prices,  money  rates,  labor 
prices,  drift  of  working  or  trading  population,  may  be  the  point 
that  requires  special  attention.  Financial  policy  needs  also  to  be 
determined  as  regards  the  confidence  of  the  pubUc  and  the  banks 
in  your  integrity  and  as  to  good  credit,  expansion  from  profits 
and  the  avoidance  of  investments  that  make  your  business 
top-heavy. 

"  Some  details  are  as  important  as  the  totals  on  the  bank 
statement,"  is  the  viewpoint  of  one  manager.  The  details  he 
referred  to  are  those  which  touch  the  firm's  relations  with  its 
public.  This  executive  from  time  to  time  inspects  his  shipping 
room  and  returned  goods  department  in  order  to  get  at  the  causes 
that  lie  behind  complaints,  misshipments  and  damaged  goods. 
Another  millionaire  owner  is  known  to  have  claimed  in  person 
rewards  offered  to  customers  who  detect  a  blunder  on  the  part 


572  BUSINESS  STATISTICS 

of  the  salespeople  in  the  arrangement  of  stock.  A  third  pro- 
prietor makes  a  cross-section  study  of  his  business  by  getting 
down  early  Monday  morning  and  going  over  the  two  days'  mail 
in  detail. 

Among  the  vital  functions  of  management  are  these:  to  decide 
finally  what  the  public  demands;  to  know  what  is  given  them  in 
goods  and  service;  to  bring  future  demand  and  supply  into 
harmony;  to  focus  into  a  poHcy  the  workmanlike  care  of  the 
production  chief,  the  credit  man's  distaste  for  risks;  the  collec- 
tion manager's  temptation  to  collect  money  at  the  sacrifice  of 
friendship;  the  salesman's  tendency  to  get  orders  regardless  of 
final  satisfaction.  As  subordinates  come  and  go,  your  business 
cannot  keep  on  an  even  keel  unless  you  balance  all  the  different 
forces  in  action  and  hold  to  a  steady  course.  Find  out,  therefore, 
why  you  are  in  business.  What  is  your  special  right  to  expect 
trade  ?  Why  should  prospects  come  to  you  rather  than  to  your 
competitor  ?  What  classes  do  you  expect  to  serve  and  how  ? 
Almost  every  enterprise  has  been  built  on  a  service  idea  —  the 
Wanamaker  one-price  retail  plan,  the  Butler  one-price  wholesale 
service  by  mail,  the  unit  idea,  the  department  store  policy  of 
convenience,  the  Marshall  Field  axiom  that  ^'  the  customer  is 
always  right." 

If  you  get  a  definite  basis  for  your  business,  it  will  not  be  hard 
to  organize  your  accounting,  cost  keeping,  orders,  complaints  and 
testimonials,  so  that  from  day  to  day  you  will  know  whether  your 
policy  is  still  right  and  if  you  are  still  selling  satisfaction. 

Beyond  the  policies  of  your  business,  out  of  the  analysis  of  past 
trade,  looms  the  biggest  job  for  the  man  at  the  manager's  desk  — 
watching  the  road  ahead,  charting  progress.  You  have  busied 
your  employees  with  detail  —  make  sure  that  you  plan  ahead. 
The  big  lines  of  policy  and  control  which  focus  at  your  desk  lead 
out  from  yesterday  into  the  tomorrows,  and  only  the  man  who  has 
them  in  their  proper  perspective  can  plan  for  the  future. 

One  manager  keeps  on  his  desk  maps  and  plans  which  require 
years  to  work  out  —  the  raw  material  of  future  business.  When 
he  has  tested  them  in  all  his  moods  and  has  worked  out  the  capital 
backing,  the  customer  demand  and  the  proper  employees  for 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  573 

detail  control,  he  sets  itemized  quotas  for  every  man  in  his  busi- 
ness; to  which  quotas  in  several  years  no  employee  has  failed  to 
measure  up  in  total  and  item  by  item.  He  has  gained  his  men's 
confidence  by  sound  judgment  and  successful  campaigning  — 
has  established  himself  in  leadership  by  long  hours  of  poring  over 
policies,  financial  and  labor  conditions,  credits,  competition  and 
opportunities  of  service. 

Management  is  not  only  the  hardest  problem  in  business,  but 
the  problem  that  comes  nearest  to  the  secret  of  failure  and  suc- 
cess. Up  at  the  top  of  every  business  —  at  the  apex  of  its  pyra- 
mid of  functions — sits  some  one  to  whom  all  lines,  wires  and  paths 
of  communication  lead;  where  focus  problems,  records  and  plans; 
from  whom  radiate  the  spirit,  the  policies  and  the  initiatives  which 
are  to  write  in  the  future  of  the  enterprise.  No  other  desk  is  so 
hard  to  fill,  because  no  other  man  must  be  so  well  rounded  and 
evenly  poised. 

No  special  knack  or  ability  will  make  a  manager  without  self- 
training  and  use  of  the  abilities  of  others.  List,  group  and 
analyze,  therefore,  the  work  that  fills  the  calendar  of  successful 
managers  —  that  goes  on  at  your  own  desk.  Reduce  your  detail 
to  system  and  assign  it  to  subordinates.  Find  out  what  fact, 
what  tendency  expressed  in  a  dozen  letters,  conferences  or  sets 
of  figures,  tells  you  something  vital  —  get  that  point  and  delegate 
the  rest.  The  subject  matter  of  your  day  may  be  different  as 
your  business  passes  from  the  little  shop  through  the  transition 
stage  where  it  is  too  big  for  intimate  daily  supervision  and  finally 
into  a  strong  corporation.  The  witness  of  successful  managers  is, 
however,  that  at  every  stage  they  are  outside  of  and  bigger  than 
their  business  —  above  it,  and  in  control. 

III.  Driving  the  Engines  of  Business* 

By  Kendall  Banning 

Compare  the  picture  of  the  head  of  a  big  business  concern,  on 
duty  at  his  executive  desk,  to  that  of  an  engineer  on  duty  at  his 
engine,  surrounded  by  appliances  that  not  only  regulate  the 

1  System,  December,  1908,  pp.  548-556.  Reprinted  by  permission  of  System. 
Illustrations  of  charts  are  omitted. 


574  BUSINESS  STATISTICS 

machinery  but  keep  him  in  constant  touch  with  every  part  of  the 
work  which  the  machine  is  doing.  Compare  the  call  buttons  on 
the  executive's  desk,  his  various  telephones,  his  graphic  record 
and  organization  charts,  his  daily-duty  card  cabinets  and  more 
particularly  his  daily,  weekly  and  monthly  report  folders  on 
finance,  labor  and  production,  to  the  power  and  fuel  indicators, 
speedometers,  gauges  and  controllers  of  the  engineer;  and  we  get 
a  picture  of  the  real  functions  of  a  business  executive. 

The  simile  may  be  carried  out  into  many  picturesque  details,  up 
to  this  one  all-important  point  of  comparison  —  that  while  the 
engineer  can  merely  attain  the  uniform  mechanical  efficiency  of 
that  machine  on  a  fixed  schedule,  the  business  executive  has 
unlimited  scope  in  the  selection  and  construction  of  his  engine  of 
business,  unlimited  choice  of  routes  and  speeds  and  unlimited 
range  of  action  and  selection  of  goals  toward  which  he  may  drive 
—  goals  that  are  limited  in  their  importance  only  by  the  capacities 
for  organization  of  the  guiding  force. 

Therein  lie  the  opportunities  that  have  been  seized  so  con- 
spicuously and  so  dramatically  by  the  great  American  executives, 
who  have  built  and  driven  American  business  organizations  over 
uncharted  roads  to  the  most  commanding  positions  that  the 
world  of  trade  has  ever  known. 

The  business  executive,  like  the  engineer,  must  at  all  times 
have  control  of  his  organization.  The  moment  either  loses  that 
grasp,  his  machine  is  beyond  his  control.  It  is  the  business  of 
both  to  see  to  it  that  their  machines  are  operating  steadily,  that 
the  various  parts  are  keeping  up  their  work  in  harmony  with  the 
others,  that  the  wastes  are  eliminated,  that  supplies  are  available, 
that  the  tracks  are  clear.  If  either  fails  to  note  the  signals,  he 
will  drive  his  engine  into  danger  just  as  surely  as  he  will  lose 
control  to  the  man  who  sees  the  signals  the  other  has  missed  and 
springs  forward  to  take  command.  Opportunities  and  dangers 
come  to  the  incapable  executive  when  he  is  unaware.  They  are 
anticipated  by  the  executive  whose  systems  of  control  are  so  fine 
as  to  let  him  feel  every  throb  of  his  organization,  every  beat  of  his 
engine  of  business,  and  allow  him  to  guide  it  and  regulate  it  and 
know  it  as  an  engineer  knows  his  machine. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  575 

What  the  Executive  Has  to  Do  —  the  Facts  He  Requires 

The  functions  of  a  business  executive  may  be  classified  thus:  — 

1.  To  keep  in  constant  touch  with  the  condition  of  every  part 
of  his  organization  through  the  medium  of  constant  and  special 
channels  of  incoming  information  from  every  department. 

2.  To  originate  plans  or  policies  that  affect  the  organization  as 
a  whole  and  to  execute  his  authority  in  keeping  the  various  parts 
harmoniously  adjusted  and  in  regulating  their  efficiency  to  meet 
demands. 

The  second  of  these  functions  must,  of  course,  be  determined 
by  the  peculiar  conditions  that  confront  each  individual  concern. 
With  the  channels  for  getting  the  statistics  on  which  such 
executive  action  is  based,  this  article  deals. 

An  executive's  systems  for  keeping  in  intimate  touch  with  his 
business  naturally  vary  in  scope  and  complexity  with  the  size 
and  purpose  of  his  organization.  They  range  from  his  casual 
morning  chat  with  Bill,  his  partner  or  manager  or  sole  employee, 
to  detailed  written  reports  and  charts  made  out  at  daily  and  some- 
times hourly  intervals  to  show  the  specific  progress  in  dollars  or 
in  units  of  production  of  each  machine  of  each  factory  depart- 
ment. They  cover  every  item  of  information  from  the  amount  of 
money  in  the  cash  drawer  to  the  percentage  of  costs  of  pin  bolts  in 
one  of  the  shops  to  their  costs  in  years  past,  with  the  reasons  for 
the  difference.  They  come  in  forms  that  vary  from  the  shout 
across  the  office  to  elaborate  charts  in  colors  that  show  in  graphic 
form  the  increase  and  decrease  of  a  subdivision  in  specific  detail. 
The  simplest  form  is  sometimes  the  best.  Reports  that  are  too 
complicated  are  as  inimical  to  real  system  as  reports  that  are 
careless  and  incomplete.  The  best  channels  of  information  are 
those  that  present  the  most  vital  facts  in  the  most  direct  form, 
that  eliminate  the  extraneous  detail  and  attain  their  purpose  in 
the  most  economical  manner,  on  precisely  the  same  principle  that 
a  straight  line  is  the  shortest  distance  between  two  points.  The 
fewer  these  points  are  in  number,  the  simpler  the  work  of  the 
executive  naturally  becomes,  but  the  number  must  not  be 
reduced  to  the  elimination  of  facts  that  affect  his  efficiency. 


576  BUSINESS  STATISTICS 

Specifically,  what  are  these  facts  ? 

For  purposes  of  illustration  the  main  channels  of  incoming 
information  may  be  classified  thus:  — 

1.  Finance.  3.   Sales. 

2.  Correspondence.  4.   Mechanical  Equipment. 

5.  Labor. 

The  fundamental  point  of  information  that  is  as  important  to 
the  smallest  as  well  as  to  the  largest  concern  is  the  amount  of 
cash  on  hand.  The  little  shopkeeper  ascertains  this  information 
by  a  glance  at  the  contents  of  the  till.  The  larger  executive  gets 
it  by  balancing  his  bank  book.  The  still  larger  executive  finds  the 
information  on  a  slip  of  paper  handed  to  him  by  his  cashier  or 
bookkeeper.  The  head  of  a  big  corporation  gets  it  on  a  report 
form  made  out  every  night  to  show  the  exact  balance  in  every 
bank  in  which  the  corporation  has  an  account,  bills  receivable, 
bills  payable,  securities  owned  and  their  prices  for  the  day,  and 
other  financial  data,  which  is  laid  upon  his  desk  every  morning 
by  the  head  of  his  financial  department.  This  information  is  as 
vital  to  the  humblest  as  well  as  to  the  greatest  executive.  It 
allows  both  to  plan  their  business  days  so  that  their  obligations 
may  be  met  and  their  credit  maintained. 

Exactly  how  much  money  is  the  company  making  or  losing  on 
each  individual  order  ?  The  figures  are  at  the  executive's  call. 
In  the  case  of  the  American  Bank  Note  Company  each  order  is 
given  a  job  number.  The  exact  cost  of  material,  the  time  spent 
on  the  order  in  each  department,  even  at  each  machine,  and  other 
data  are  recorded  on  the  cost  sheet.  When  the  order  is  completed 
and  the  cost  sheet  is  filled,  it  is  placed  in  an  envelope,  duly 
labeled,  and  immediately  sent  by  messenger  to  the  executive. 
The  costs  of  production  are  compared  to  the  selling  price  and  the 
profit  or  loss  is  known  to  a  cent.  If  a  loss  is  shown,  the  executive 
confers  with  the  manufacturing  and  estimating  departments  and 
either  reduces  costs  of  production  or  boosts  selling  price. 

From  these  job-cost  sheets  are  made  up  the  reports  of  weekly 
costs.  From  the  reports  of  weekly  costs  are  made  up  the  reports 
of  monthly  costs.    Both  of  the  latter  are  compared  to  the  corre- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  577 

spending  records  of  preceding  years.  Both  are  filed  in  leather 
binders  and  kept  in  the  executive's  office  for  ready  reference. 
From  them  he  can  learn  in  a  moment  the  cost  of  any  detail  on 
any  job  for  any  year.  Similarly  he  gets  reports  every  month 
that  show  the  profit  or  loss  on  each  order,  the  value  of  the  stock 
on  hand  and  figures  that  show  the  exact  status  of  the  business  at 
the  close  of  each  month.  In  short,  the  books  are  closed  and 
the  annual  statement  is  made  up,  for  the  executive's  attention, 
twelve  times  a  year. 

The  head  of  the  Regal  Shoe  Company  gets  this  information  in 
more  graphic  form  from  his  statistical  department,  where  all  the 
records  and  reports  of  every  department  are  concentrated  and 
whence  they  emanate  in  analytical  colored  charts  which  are 
presented  to  the  executive  in  tabloid  form.  A  few  years  ago 
information  concerning  the  various  departments  was  brought  to 
the  executive's  attention  by  the  heads  of  each  of  these  depart- 
ments. As  the  departments  grew,  these  reports  multiplied  into 
hundreds.  The  executive  was  no  longer  able  to  extract  the  data 
needed.  This  work  is  now  attended  to  by  a  department  estab- 
lished for  this  sole  purpose.  It  supplies  to  the  executive  the  charts 
and  maps  on  which  the  future  plans  of  the  company  are  deter- 
mined. 

On  this  report  appears  all  information  which  the  executive  may 
need  in  planning  his  day's  work.  It  gives  the  estimate  of  sales 
for  the  first  half  and  on  the  last  half  of  the  month,  with  the  aver- 
age of  each  day  indicated.  Below  this  appears  a  record  of  the 
total  sales  made  up  to  date  as  compared  to  the  average  daily  sales 
to  date;  a  comparison  of  the  total  sales  yet  to  be  made  in  order  to 
maintain  the  sales  quota;  a  comparison  with  a  similar  record  of 
the  previous  year;  a  record  of  the  products  of  the  present  month 
as  compared  with  the  year  before,  and  a  record  of  the  distribution 
of  the  stock  in  the  factory,  in  the  stores  and  in  transit.  At  the 
bottom  of  the  sheet  is  a  record  of  the  cash  balance  of  the  year 
before.  This  daily  report  is  taken  up  for  action  by  the  executive 
the  first  thing  every  morning,  before  opening  the  morning  mail. 
Any  unusual  condition  is  thus  brought  to  his  attention  promptly 
and  a  check  placed  upon  leaks  before  they  involve  loss. 


578  BUSINESS  STATISTICS 

In  the  same  way  the  executive  is  informed  of  the  weekly  sales 
and  expenses  of  each  department  and  of  each  store,  compared  to 
what  they  were  the  year  before.  The  figures  representing  the 
payrolls  are  indicated  in  barometer-like  form  that  show  from 
across  the  office  what  their  relative  size  is  now  to  a  year  ago. 
They  are  as  clear  to  him  as  the  speed  or  power  indicator  is  to  the 
engineer. 

A  third  and  more  personal  system  of  keeping  an  executive 
informed  of  the  work  of  his  departments  is  observed  by  John  H. 
Patterson,  the  head  of  the  National  Cash  Register  Company. 
This  executive  practically  makes  the  department  come  to  him, 
and  explain  in  the  person  of  its  head  what  it  is  doing.  For  this 
purpose,  each  department  is  equipped  with  a  folding  blackboard, 
containing  one  or  two  dozen  leaves.  Each  leaf  or  page  is  num- 
bered and  reserved  for  information  concerning  the  various  duties 
of  that  department.  Its  output,  its  expenses,  its  changes  in 
personnel,  its  suggestions  for  improvements,  and  its  accomplish- 
ments and  obligations  are  written  thereon  daily.  A  glance 
through  it  shows  the  status  of  work.  These  blackboards  are 
adjusted  to  the  walls  of  the  departments.  At  the  command  of 
the  executive,  they  are  transferred  to  the  wall  of  the  president's 
office  and  inspected  and  dissected  by  him  with  the  assistance  of 
the  department  head. 

The  statistics  of  each  department  are,  of  course,  recorded  in 
regular  form;  the  blackboard  scheme,  however,  enables  the  exec- 
utive to  get  directly,  from  the  head  of  each  subdivision,  a  direct 
and  intimate  review  of  present  conditions  and  plans  for  the  future 
that  do  not  appear  in  the  company's  records. 

Next  in  importance  is  the  daily  mail.  The  mail  contains 
inquiries,  orders,  money,  complaints,  reports  —  matters  on  which 
the  work  of  the  organization  rests,  the  fuel  with  which  the  engine 
is  run.  If  the  mail  is  small,  the  executive  opens  it  and  attends  to 
the  contents  himself,  or  marks  on  each  letter  the  individual  or 
department  to  which  it  is  to  be  referred  for  action.  If  the  mail  is 
heavy  and  the  firm  is  large,  the  mail  goes  to  the  mail  clerk  or  to 
the  correspondence  department,  from  which  the  letters  are 
similarly  distributed  and  a  report  is  made  to  the  executive  head. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  579 

This  correspondence  —  the  incoming  and  the  outgoing  mail  —  is 
the  pulse  of  a  firm's  progress  with  the  outside  world.  The  closer 
an  executive  is  in  touch  with  this  pulse,  the  quicker  he  can  detect 
fluctuations  and  administer  accordingly. 

A  business  man  once  wrote  a  request  for  some  minor  information 
to  the  American  Bank  Note  Company  of  New  York.  A  year  later 
he  met  the  president  of  the  company,  Warren  L.  Green.  To  the 
man's  surprise  Mr.  Green  recalled  not  only  the  request,  but  the 
disposition  that  had  been  made  of  it.  Yet  Mr.  Green  had  not 
seen  any  of  the  correspondence.  Similarly,  Mr.  Green  is  familiar 
with  all  the  correspondence  that  reaches  the  company.  Yet  his 
system  is  as  simple  and  compact  as  it  is  labor  saving. 

All  letters  that  come  to  the  company  go  directly  to  the  corre- 
spondence bureau.  This  bureau  consists  of  two  clerks,  who  open 
all  letters.  To  one  is  referred  all  foreign  communications,  to  the 
other  aU  domestic  correspondence.  Each  clerk  typewrites  in 
capitals  on  the  left  margin  of  a  sheet  of  paper,  dated,  ruled  and 
perforated  for  binding  in  a  desk  folder,  the  name  of  the  firm  or 
individual  from  whom  the  letters  come;  or  on  the  left  she  type- 
writes a  brief  resume  of  the  contents  of  each  letter  in  two  to 
thirty  words.  Letters  that  refer  to  financial  matters  are  listed  on 
a  lavender  sheet.  Correspondence  about  equipments  or  supplies 
are  recorded  on  blue  paper.  Communications  from  or  about  the 
branch  houses  are  recorded  on  green  sheets,  letters  about  typog- 
raphy or  printing  on  yellow  sheets,  and  about  securities  or  other 
engraved  products  on  white  sheets.  Thus  each  of  the  five  main 
divisions  of  the  business  are  differentiated  by  their  distinguishing 
colors.  After  each  resume  are  placed  the  initials  of  the  individual 
to  whom  the  letter  is  referred. 

Early  each  morning  these  reports  are  inserted  in  a  leather  bound 
folder,  the  reports  of  the  day  preceding  are  placed  in  another 
folder  with  the  reports  for  the  entire  month,  and  both  folders  are 
placed  on  the  president's  desk.  A  moment's  glance  over  these 
reports  gives  him  the  gist  of  the  morning's  mail  and  enables  him 
to  select  such  items  as  he  may  care  to  take  up  personally. 

After  each  delivery  of  mail,  this  folder  is  taken  to  the  bureau, 
the  additions  are  made,  and  the  report  is  returned  to  the  presi- 


S8o  BUSINESS  STATISTICS 

dent's  desk.  At  the  close  of  the  day,  the  bureau  notes  in  pencil 
the  disposition  that  has  been  made  of  each  letter,  for  future 
reference. 

A  third  desk  folder  is  reserved  for  similar  reports  of  com- 
plaints that  are  made.  Has  there  been  a  kick  about  the  quality 
of  some  supplies  that  have  been  ordered  ?  It  is  reported  on  a  blue 
sheet.  Has  there  been  a  delay  in  the  delivery  of  some  printed 
matter  ?  It  is  recorded  on  a  yellow  sheet.  Does  a  customer 
complain  about  his  bill  ?    It  is  noted  on  a  lavender  sheet. 

In  this  way  the  executive  keeps  the  correspondence  of  the  com- 
pany under  his  constant  surveillance.  Every  letter  comes  to  his 
notice,  and  the  employee  to  whom  it  is  referred  knows  it  and  acts 
accordingly.  The  system  maintains  the  discipline  of  the  office; 
moreover,  it  enables  the  president  to  keep  a  rein  on  the  corre- 
spondence of  every  department. 

Order,  sales  —  the  fuel  that  keeps  the  business  engine  running 
—  are  the  easiest  items  for  an  executive  to  record.  Mr.  Green 
gets  a  record  of  them  from  a  small  desk-cabinet,  containing 
dated  cards,  each  card  bearing  a  record  of  the  orders  received 
under  the  date  it  bears.  Thus  the  cabinet  is  a  record  of  orders 
received  every  day  from  the  first  of  the  year.  From  this  record 
are  made  up  the  itemized  weekly  and  monthly  order-report 
sheets,  showing  the  number  and  value  of  orders  received  each  day 
from  each  branch  office,  as  compared  with  the  best  record  of  the 
last  ten  years,  the  worst  of  the  last  ten  years  and  the  average. 

Mr.  Bliss  of  the  Regal  Shoe  Company  gets  his  record  in  picture 
form.  His  chart  shows  in  varicolored  inks  the  weekly  sales  of 
each  store.  It  indicates  the  actual  sales  for  each  week  for  the 
past  four  months,  the  proportion  of  expenses  to  the  sales,  the 
sales  of  the  corresponding  week  the  year  before,  the  expense  of 
each  store  for  the  present  week  and  the  week  a  year  ago,  the 
number  of  employees,  and  other  data  that  form  the  basis  of 
executive  action. 

The  chart,  for  example,  that  shows  the  semi-monthly  records  of 
sales,  is  divided  into  latitudinal  sections  to  represent  the  store 
numbers.  They  can  represent  departments  of  a  store  just  as  well. 
The  figures  in  the  left  column  represent  the  increase  or  decrease 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  58 1 

in  any  store  sales,  extending  upward  and  downward  from  the  zero 
point.  Here  are  indicated  the  average  sales  for  all  stores  and  the 
record  of  each  store  in  comparison,  extending  both  upward  and 
downward  as  it  falls  above  and  below  the  average.  The  store 
which  shows  the  greatest  sales  appears  at  the  left,  the  store  which 
shows  the  smallest  sales  at  the  right.  The  result  is  a  diagram  like 
a  stairway,  on  which  the  position  of  each  store  is  represented  by 
a  step.  In  connection  with  this  figure,  the  increase  from  the  first 
of  the  season  to  date  is  indicated  by  a  colored  line  on  which  the 
comparisons  may  be  based. 

On  the  first  day  of  each  month,  another  chart  is  brought  to  the 
executive's  attention.  This  chart  compares  the  month's  sales  and 
production  with  that  of  the  month  preceding.  The  numbers 
across  the  top  represent  the  days  of  the  month  and  the  figures  on 
the  column  on  the  left  represent  the  number  of  sales  and  the  pro- 
duction at  the  factory.  The  lines  represent  the  sales  for  each  day. 
Saturday,  it  will  be  noticed  —  pay-day  —  shows  a  marked 
increase  over  any  other  day  of  the  week.  The  average  daily  sales 
are  indicated  by  a  line  extending  from  left  to  right.  The  series  of 
circles  extending  upward  and  to  the  right  represents  the  accu- 
mulative sales  and  the  accumulative  products.  The  line  showing 
the  stock  on  hand  must  always  run  just  enough  ahead  of  the  line 
of  production  to  avoid  delays  through  lack  of  stock.  All  of  this 
information  is  imparted  to  the  executive  at  a  glance  and  deficien- 
cies are  brought  to  his  attention  automatically  in  such  a  way  as 
to  enable  him  to  distribute  his  forces  to  the  best  advantage. 

The  systems  for  keeping  the  executive  in  touch  with  the 
mechanical  equipment  of  his  organization,  especially  in  a  manu- 
facturing organization,  are  so  analogous  to  the  mechanical 
appliances  that  keep  an  engineer  informed  of  the  workings  of  his 
engine  as  to  amount  practically  to  the  same  thing.  The  self- 
registering  charts  in  the  latter  case  are  permanent  fiixtures  of  the 
engine;  in  the  case  of  the  executive  they  are  sent  to  his  office. 
From  them  he  learns  of  the  power  being  used,  the  amount  of  fuel 
consumed,  the  productive  power  per  unit  of  fuel,  the  productive 
power  of  each  machine  and  of  each  employee.  An  indicator-chart 
was  the  direct  means  of  saving  a  large  manufacturing  concern 


582  BUSINESS  STATISTICS 

$89,000  a  year  by  pointing  out  the  wastes  in  power  and  labor. 
From  it  the  executive  learned  that  the  maximum  load  of  the  plant, 
amounting  to  1,000  horse-power,  was  not  used  in  the  morning 
until  8  o'clock,  although  the  plant  opened  at  6.45.  He  learned 
that  the  same  condition  prevailed  after  the  lunch  hour,  when  the 
maximum  load  was  not  borne  until  2.30  instead  of  at  i  o'clock. 
He  learned  that  this  load  began  to  drop  at  1 1  o'clock  instead  of 
running  up  squarely  to  the  closing  hour  at  noon. 

In  like  manner  the  load  began  to  decrease  at  4  o'clock  in- 
stead of  running  abruptly  to  5  o'clock,  the  closing  hour.  This 
report  chart  showed,  in  brief,  that  the  friction  load  of  the 
engine  for  transmission  devices  —  belting,  shafting  and  idle 
machines  —  amounted  to  a  trifle  over  50  per  cent  of  the  maxi- 
mum power  required  when  the  plant  was  running  with  its  full 
load.  The  amount  of  power  consumed  is  proportionate  to  the 
machines  in  operation.  The  number  of  machines  in  operation  is 
proportionate  to  the  men  at  work.  Hence,  the  men  did  not  all 
begin  work  promptly  and  did  not  continue  up  to  the  blast  of  the 
whistle  —  a  fact  that  investigation  proved  true.  Similar  tests 
can  be  applied  to  almost  any  department  of  a  manufacturing 
plant,  or  to  any  department  of  a  store. 

The  American  Bank  Note  Company  keeps  a  record  of  the  work 
of  each  individual  machine  in  its  factories.  Each  machine  of  each 
type  is  numbered  and  a  record  is  made  each  day  of  the  operations 
performed  by  it.  The  time  spent  by  the  workmen  in  getting  it 
ready,  the  amount  of  preliminary  work,  the  duration  of  its  opera- 
tions, its  speed,  its  delays,  the  value  of  the  order  on  which  it  is 
used,  and  the  amount  of  incompleted  work  are  all  represented  in 
figures  that  go  in  tabulated  form  to  the  executive.  These  tables 
furnish  all  the  data  that  an  executive  requires  for  estimating  the 
value  of  his  mechanical  equipment  and  for  knowing  the  progress 
of  the  work  on  each  order.  Does  a  customer  inquire  when  his 
goods  will  be  delivered  ?  The  distribution  of  his  order  through 
the  plant,  the  amount  furnished  and  still  to  be  done  may  be  an- 
nounced to  him  without  requiring  him  to  "  hold"  the  telephone. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  583 

IV.  Behind  the  Figures  ^ 

By  a.  E.  Andersen 

An  unexplained  shortage  of  $15,000  in  the  raw  material  account 
for  the  year  just  closed  led  the  general  manager  of  a  specialty 
concern  through  the  sales,  purchasing,  cost  and  operating  depart- 
ments to  the  Httle  registering  device  at  the  side  of  each  finishing 
machine. 

The  product  was  sold  by  the  lineal  foot.  The  figures  indicated 
that  the  material  used  exceeded  by  $15,000  worth  what  had  been 
delivered  to  customers.  No  "  bookkeeping  errors  "  were  foimd, 
but  when  the  accuracy  of  the  records  had  been  checked  and 
proved,  the  reason  for  the  loss  was  found  in  the  devices  for  regis- 
tering the  quantity  of  product  turned  out.  These  were  out  of 
order.  For  more  than  a  year  every  customer  had  been  charged 
for  much  less  than  had  actually  been  shipped  because  the  counters 
had  '^  slipped."  Since  the  gifts  were  of  finished  product  the  loss 
was  nearly  double  the  cost  of  the  raw  material. 

Right  figures  check,  guide  and  control  any  business.  A  suitable 
accounting  system,  matched  to  the  size  and  needs  of  the  business, 
throws  to  the  surface  significant  facts.  More  —  it  brings  to  the 
man  at  the  head  of  the  business  grouped  and  related  details 
which  otherwise  would  escape  attention.  A  market  man  in 
Massachusetts  learns  from  his  records  of  what  people  are  buying, 
when  he  ought  to  push  fish  instead  of  meat,  or  pork  instead  of 
mutton.  He  is  getting  behind  his  figures,  just  as  is  the  manu- 
facturer in  Chicago  who  sets  quotas  of  sales  and  output  based  on 
what  has  been  sold  and  made  in  the  past  and  asks  "  why  ?  " 
when  the  monthly  reports  fluctuate  either  below  or  above  the 
figures  set.  No  matter  what  your  business  may  be,  you  can  set 
your  accounting  to  watch  the  significant  factors  in  that  business. 

Different  managers  have  different  methods  of  finding  these 
significant  facts.  What  some  men  sense  by  experience  others  get 
from  tabulated  and  charted  facts.  A  factory  cost  accountant  put 
in  a  rather  elaborate  system  for  the  superintendent.     He  col- 

1  System,  January,  1913,  pp.  3-12.  Reprinted  by  permission  of  System.  Illus- 
txations  of  charts  are  omitted. 


584  BUSINESS  STATISTICS 

lected  the  costs  of  steel  for  the  blade,  the  wood  for  the  handle,  the 
labor  and  overhead  expenses  in  making  a  kitchen  knife.  After  he 
had  collected  figures  for  a  couple  of  months,  the  superintendent 
of  the  plant  took  a  notebook  out  of  his  pocket  and  said  that  they 
had  agreed  pretty  closely  with  what  he  had  figured  as  the  costs  on 
the  different  grades. 

The  superintendent  knew  by  long  experience  the  average  total 
cost  of  certain  classes  of  orders.  But  when  the  cost  man  went  over 
his  tabulated  figures  and  showed  him  the  relative  department 
charges  for  overhead  expenses,  he  brought  to  the  superintendent's 
attention  a  fact  which  he  had  not  before  realized  —  that  he  was 
losing  money  on  certain  classes  of  goods.  Only  by  department 
comparisons  could  such  a  condition  come  to  light. 

A  suitable  cost  system  in  a  manufacturing  plant  may  show  one 
manager  the  significant  facts  in  his  business.  Figures  may 
prophesy  in  a  merchandising  establishment,  when  the  records  are 
planned  to  control  the  business,  fbe  sales  manager  of  a  large 
jewelry  house,  with  an  extensive  local  and  country  business,  has  a 
plan  for  knowing  what  is  going  on,  which  is  adaptable  to  other 
lines.  Like  other  executives,  he  has  found  that  charts  showing 
gross  sales  both  in  quantities  and  money  values  will  enable  him 
to  know  definitely  what  the  sales  department  is  doing  in  each  line 
and  will  direct  him  to  the  weak  spots  in  his  organization. 

Returning  from  a  trip  abroad,  he  found  unexpected  conditions 
in  the  business,  as  indicated  by  the  chart.  A  summary  of  sales 
by  months  and  accumulative  sales  for  the  same  period  had  been 
contrasted  with  the  corresponding  figures  for  the  corresponding 
month  or  period  of  the  previous  year.  At  the  beginning  of 
January,  191 1,  just  before  the  general  manager  left,  quite  an 
extensive  advertising  campaign  had  been  prepared.  He  had 
looked  for  a  large  increase  in  sales. 

But  as  the  chart  indicated,  when  he  returned  on  the  last  of  May, 
instead  of  an  increase  there  had  been  a  gradual  decline  in  business 
for  the  current  year.  Investigation  showed  that  the  advertising 
campaign  planned  to  start  the  first  of  January  had  not  been  begun 
until  late  in  March.  Had  he  not  compared  his  sales  he  would  not 
have  learned  at  once  the  cause  of  the  decHne.    As  it  was,  the  in- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  585 

crease  of  business  which  was  shown  for  the  months  of  July  and 
August  on  the  charts  was  made  possible  by  the  prompt  application 
of  additional  pressure  on  the  sales  and  advertising  departments. 

Records  of  this  sort  reduced  to  a  unit  basis  enable  the  managers 
of  all  kinds  of  businesses  to  watch  their  courses.  Statements  and 
charts,  which  show  the  average  price  realized  per  ton,  per  pound 
or  per  barrel  by  steel,  glue,  and  brewing  companies,  enable  the 
sales  managers  of  these  respective  concerns  to  keep  in  touch  with 
the  results  obtained  by  each  salesman.  Similarly  the  payrolls  of 
large  retail  stores  are  watched.  A  record  is  kept  of  each  clerk's 
business,  day  by  day.  Each  week  the  percentage  of  salaries  to  the 
sales  made  is  calculated.  At  any  time  the  superintendent  and 
department  manager  know  what  the  payroll  stands  for  in  sales, 
and  which  clerks  are  efficient. 

Whenever  a  business  man,  at  the  end  of  the  year  or  the  month, 
sits  at  his  desk  with  the  figures  of  the  period  before  him,  one  of 
the  obvious  things  he  watches  is  the  relation  between  expenses 
and  the  amount  of  business  done.  His  records  must  be  planned  to 
show  comparative  statements  and  charts  of  sales,  cost  of  sales, 
expenses  and  net  profits.  Unless  the  figures  get  to  him  in  this 
form  it  is  difficult  to  see  how  the  outlay  matches  up  with  the 
amount  of  business  done. 

An  interesting  example  indicates  how  the  vice-president  of  a 
wholesale  house  follows  gross  profits  and  departmental  expenses 
by  means  of  a  chart.  Trade  conditions  had  been  poor  and  one 
of  the  department  managers  failed  to  compare  his  departmental 
expense  with  his  gross  profits.  This  condition  continued  until 
the  month  of  August  when,  as  the  chart  indicated,  the  gross 
profits  were  practically  consumed  by  the  departmental  expense. 
Each  month  now  this  department  head  gets  his  comparative 
statements  of  gross  profits  and  departmental  expenses  and  does 
not  wait  for  the  figures  to  "  push  "  him.    He  pushes  the  figures. 

Tradition  says  figures  do  not  lie.  Yet,  the  wrong  interpretation 
of  figures  may  throw  the  head  of  the  business  completely  off  the 
track.  Groups  of  facts  must  be  considered  with  relation  to  the 
right  groups  of  corresponding  facts.  Both  sides  of  the  question 
must  be  considered  in  the  tabulated  statistics. 


586  BUSINESS  STATISTICS 

A  sash  and  door  company  began  to  scrutinize  the  records  of  its 
twelve  salesmen,  mostly  young  and  middle-aged  men.  The  low 
gross  sales  of  one  of  the  older  salesmen  at  first  led  the  president  to 
believe  that  this  older  man  was  being  kept  on  the  payroll  for 
sentimental  reasons.  But  when  he  took  the  sales  records  of  the 
various  products  and  compared  them  with  the  profits  obtained 
on  each  sale  he  changed  his  mind.  He  found  that  while  the  older 
man  sold  less  in  the  aggregate  than  his  fellow  travelers,  the  total 
profit  on  his  business  was  greater.  Because  of  his  experience,  he 
knew  the  profitable  and  unprofitable  lines.  The  comparison  of 
the  two  sets  of  figures  showed  how  the  company  had  gone  wrong 
and  a  new  sales  poUcy  was  inaugurated  at  once.  Every  salesman 
was  instructed  to  concentrate  effort  on  the  profitable  lines,  and 
allow  the  low-profit  Hnes  to  sell  themselves  or  use  them  to  push 
the  more  profitable  specialties. 

Look  into  any  group  of  figures  for  the  significant  items;  the  rec- 
ords of  one  department  compared  with  the  others  or  of  one  branch 
compared  with  the  next  will  often  suggest  a  more  uniformly 
profitable  way  of  handling  the  business.  Lumped  figures  do  not 
show  tendencies.  A  poor  machine  in  one  department  may  keep 
up  the  total  relative  cost  of  the  output  of  that  department.  One 
slow  line  of  goods  may  distort  the  figures  of  a  store.  It  is  better 
to  individualize  accounts  wherever  possible  in  order  that  each 
may  stand  on  its  own  merits. 

The  president  of  a  mining  company  suspected  that  his  repair 
and  renewal  account  was  higher  than  it  should  be  purely  because 
of  his  general  knowledge  of  conditions.  Not  until  he  had  com- 
pared the  expenditures  for  repairs  and  renewals  on  three  machines 
did  he  realize  that  two  of  the  machines  had  suffered  unjustly 
for  the  fault  of  one.  The  three  cutting  machines  were  of  the 
same  general  design  and  cost  and  were  installed  about  the  same 
time.  When  the  facts  came  out  that  machine  Number  3  had 
much  greater  repair  and  renewal  expense  than  the  other  two,  it 
was  discovered  that  the  man  who  had  charge  of  this  machine 
subjected  it  to  much  rougher  usage  than  the  operators  of  either 
of  the  other  two  machines. 

Figures  that  mean  most  to  the  head  of  a  business  must  contain 
all  the  elements  entering  into  a  consideration  of  any  particular 


Iw-ETRS^ 


.>SE. 


588  BUSINESS  STATISTICS 

ously.  Unless  the  expenses  are  put  on  paper  in  comparative 
form,  it  is  hard  to  get  behind  the  totals  and  find  out  just  what  is 
causing  the  increase  in  expense.  Non-productive  labor,  salaries 
of  timekeepers,  order  and  shop  clerks  and  supplies  consumed  are 
all  details  which  the  head  needs  to  group  in  such  form  that  ready- 
comparisons  may  be  made. 

Itemized,  comparative  figures  make  it  possible  to  find  the 
reason  for  high  overhead  expenses  in  the  monthly  statement  of  a 
business.  Bulk  totals,  unless  seen  in  relation  to  other  figures, 
have  little  significance  unless  the  man  who  watches  the  figures 
keeps  the  basic  figures  in  the  back  of  his  head,  and  compares  the 
bulk  total  with  that.  Last  year's  figures  may  generally  be  taken 
as  a  basis  for  this  year's  total.  Monthly  quotas  of  expenses  some- 
times are  best.  Variations  from  standard  can  then  be  checked 
before  a  wrong  policy  is  established.  The  cost  of  lubricants  in  one 
mine  showed  a  marked  increase  over  the  corresponding  period  of 
the  previous  year.  When  the  superintendent  investigated  he 
found  that  the  machine  operators  were  burning  lubricating  oil 
costing  thirty  cents  a  gallon  in  their  torches  instead  of  six-cent 
illuminating  oil. 

To  check  the  previous  waste,  each  machine  operator  was 
allotted  two  gallons  of  oil  per  day,  although  an  additional  quan- 
tity could  be  had  by  giving  reasons.  A  second  cause  for  the  high 
lubricating  cost  was  caught  by  watching  the  amount  of  money 
received  for  oil  barrels  returned.  The  credit  item  for  returned 
barrels  seemed  smaller  than  the  year  before.  It  developed  that 
the  miners,  instead  of  tapping  a  barrel,  had  been  knocking  in  the 
head  and  filling  their  pails  by  dipping  into  the  barrel.  About  six 
hundred  dollars  a  year  was  saved  by  stopping  this  practice. 

Comparative  statements  of  factory  expenses  are  always  instruc- 
tive. In  one  case  when  such  figures  came  to  the  attention  of  the 
manager,  an  increase  of  $834.25  in  miscellaneous  materials  and 
supplies  uncovered  an  important  source  of  waste.  The  foreman 
of  Department  A  had  in  his  charge  a  large  stock  of  materials  and 
supplies,  many  of  which  were  used  in  Department  B.  Unknown 
to  the  former,  the  head  of  Department  B  had  taken  and  used 
wastefuUy  large  quantities  of  material,  thinking  that  the  other 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  589 

foreman  would  have  difficulty  in  explaining  the  large  debit  dif- 
ference in  his  material  account.  Two  little  columns  of  figures 
brought  out  this  badly  organized  spot  in  the  factory  where 
inefficiency  existed  because  of  the  jealous  rivalry  of  these  two 
foremen. 

All  sorts  of  items  in  overhead  expense  can  be  cared  for  if  the 
totals  come  before  the  manager  not  in  the  form  of  bulk  figures 
but  itemized  under  separate  headings.  The  electric-power-used 
item  in  one  large  manufacturing  concern  totaled  $42,300  for  the 
year  ending  December  31,  191 1.  In  going  over  the  figures,  the 
manager  of  the  plant  thought  here  was  an  item  which,  would  cost 
more  next  year  because  he  expected  an  increase  in  the  business 
and  power  used  would  increase  almost  in  proportion  to  an  increase 
in  production. 

The  totals  stopped  him.  They  looked  big  for  the  work  he 
already  did.  He  went  out  through  the  plant  and  made  some 
rough  estimates  of  apparent  wastes  in  power  here  and  there. 
Then  he  talked  over  the  situation  with  his  electrical  engineer. 
He  found  that  by  overhauling  his  wiring,  individual  meters  could 
be  put  in  the  different  departments  and  so  the  expense  of  current 
used  in  each  shop  determined.  The  manager  invested  nine 
thousand  dollars  in  these  changes.  And  the  first  ten  months  of 
the  current  year  indicate  that  in  spite  of  an  increase  of  15  per  cent 
in  production  over  last  year  the  total  power  cost  will  be,  roughly, 
thirty- two  thousand  dollars.  The  saving  in  power  alone  the  first 
year  will  pay  for  the  changes  made  in  the  power  equipment. 

Just  as  properly  displayed  and  grouped  figures  will  show  the 
rise  and  fall  in  manufacturing  expenses,  so  they  will  indicate  to 
the  factory  superintendent  the  interrelation  between  productive 
and  non-productive  labor  — :  the  totals  watched  most  jealously  in 
every  manufacturing  plant,  since  every  manager  knows  the 
necessity  of  keeping  down  the  ratio  between  non-productive  and 
productive  labor.  The  relative  importance  of  these  items  escaped 
one  manager  until  he  plotted  his  figures  in  chart  form.  Put  in 
this  graphic  way,  the  increase  in  non-productive  labor  for  April, 
191 1,  was  apparent  at  a  glance.  When  the  foreman  of  the  de- 
partment was  asked  for  an  explanation  it  was  found  that  two 


590  BUSINESS  STATISTICS 

skilled  workmen  had  been  kept  on  the  payroll  during  a  slack 
period  in  order  that  the  men  would  be  available  when  business 
increased. 

Such  records  are  history.  The  money  had  been  spent.  But  it 
was  easy  to  establish  a  poUcy  that  thereafter  the  foreman  should 
not  settle  such  questions  himself  but  should  confer  with  the 
superintendent.  In  this  case  it  was  found  that  the  particular 
men  on  this  work  could  have  been  easily  replaced,  although  in  all 
instances  this  might  not  have  been  the  case.  In  November  of 
the  same  year,  that  chart  showed  that  non-productive  labor  in 
Department  C  increased  one  hundred  dollars.  In  this  case,  the 
figures  were  prophecy,  not  history,  for  when  the  manager  went  be- 
hind them  he  found  that  they  represented  an  increase  in  truckers 
to  carry  out  a  different  method  of  moving  and  shifting  merchan- 
dise which  was  not  necessary. 

"  Let  every  dollar  of  capital  invested  or  borrowed  perform  its 
full  duty,"  is  the  way  a  prominent  banker  expresses  the  need  of 
keeping  inventories,  customers'  accounts,  notes  receivable,  cash 
and  working  liabilities  at  the  minimum  and  at  the  same  time 
producing  the  maximum  earnings.  These  are  conditions  which 
the  managers  of  a  variety  of  concerns  may  look  for  in  their 
statements.  Just  as  records  will  show  tendencies  in  sales  and 
explain  department  outputs  and  machine  efficiency,  so  the 
financial  condition  of  a  business  may  be  watched. 

Under  normal  conditions  investment  in  working  assets  of  such 
businesses  as  hardware,  grocery,  paint,  shoes,  jewelry,  drug, 
dry  goods,  automobile  and  steel  can  easily  be  determined. 
Definite  relationship  must  exist  between  capital  represented  in 
working  assets  and  the  annual  turnover.  Records  can  be  drawn 
from  different  sections  of  the  business  to  show  "  lock-up  in  work- 
ing capital  "  at  the  close  of  each  month.  Failure  to  keep  this  at 
the  minimum  necessitates  borrowing  and  paying  of  interest 
otherwise  unnecessary. 

One  manufacturer  traced  his  uninvested  working  assets  through 
his  record  of  uncollected  customers'  accounts  and  inventories, 
as  shown  by  his  charts.  Two  branches  in  St.  Louis  and  Omaha, 
selling  belting,  pulleys  and  other  supplies,   did  substantially 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  59 1 

the  same  volume  of  business  and  operated  under  much  the 
same  conditions.  The  figures  showed,  however,  that  the  Omaha 
branch  had  an  investment  in  stock  and  accounts  $30,000  larger 
than  that  of  the  St.  Louis  branch.  When  the  situation  was  sifted 
down  to  its  elements,  it  was  discovered  that  the  Omaha  branch 
did  not  give  the  same  strict  attention  to  stock-keeping  and  the 
collection  of  accounts  as  did  the  St.  Louis  office.  By  installing  a 
perpetual  inventory  and  efficient  sales  records  and  revising  the 
collection  methods,  the  Omaha  situation  was  brought  up  to  the 
St.  Louis  standard. 

In  like  manner  the  investment  in  the  several  classes  of  assets 
in  various  businesses  may  be  profitably  compared.  Just  as  well 
as  in  sales  and  expense,  the  head  of  the  business  may  see  his 
figures  in  a  "  per  unit  "  form.  On  this  uniform  basis,  the  relative 
investment  in  different  branches  can  easily  be  seen  and  the 
working  assets  kept  at  the  lowest  possible  points  in  all. 

Nor  is  it  in  the  large  business  alone  that  this  class  of  records  is 
worth  while.  A  printer  doing  an  annual  business  of  about 
$25,000  revised  his  storekeeping  and  accounting  system  and 
reduced  his  inventories  by  $1,500  and  his  uncollected  customers' 
accounts  by  $2,000.  This  $3,500  has  enabled  him  to  pay  off 
bank  loans  and  save  about  $175  a  year  in  interest.  The  plan  by 
which  he  reduced  his  inventory  should  be  of  less  interest  to  every 
business  man  than  the  fact  that  a  basic  principle  in  business  is 
careful  watch  over  the  investment  in  inventories,  customers' 
accounts,  and  notes  receivable. 

The  inventory  figure  in  any  business  is  a  worth-while  study, 
not  only  from  the  investment  angle,  but  from  that  of  sales  and 
purchases.  Comparisons  of  sales,  purchases,  and  inventory  from 
time  to  time  will  bring  out  facts  in  the  business  and  help  to 
maintain  their  correct  ratios.  Records  that  show  when  to  buy 
will  enable  the  purchaser  to  keep  fresh  materials  and  stocks  on 
hand,  as  well  as  reduce  capital  tied  up  in  inventories. 

That  definite  figures,  rightly  grouped,  will  bring  before  the 
head  of  a  business  a  better  understanding  of  his  whole  business, 
these  various  experiences  of  other  managers  show.  Any  business 
man  may  take  a  similar  point  of  view  on  his  figures. 


592  BUSINESS  STATISTICS 

Figures  that  prophesy  mean  the  success  or  failure  of  men  in 
business.  For  right  accounting  is  more  than  history.  It  is  not 
enough  to  know  what  has  been  done;  records  should  show  what 
should  be  done.  The  directors  of  a  large  Eastern  manufacturing 
concern,  with  inventories  valued  at  ten  million  dollars,  voted  to 
pay  an  expert  eighteen  thousand  dollars  a  year  to  devise  means 
of  giving  them  figures  that  would  prophesy.  By  devising  and 
installing  a  system  of  purchasing,  receiving  and  storekeeping 
that  would  enforce  minimum  stocks  of  raw  materials,  goods  in 
process  and  finished  products  without  impairing  the  efficiency  of 
the  business,  the  money  tied  up  in  inventories  was  reduced  by 
nearly  two  million  dollars.  The  directors  proved  the  value  of 
right  accounting. 

Any  business  man  who  looks  upon  his  accoimting  as  mere 
recording  and  not  as  a  method  of  control  for  the  details  of  his 
business  misses  the  vital  significance  and  use  of  the  facts  behind 
its  figures. 

V.  The  Load  Factor  ^ 

By  G.  p.  Watkins 

The  load  factor,  as  defined  by  electrical  engineers,  is  the  ratio  of 
average  to  maximum  load  for  some  specified  period.  More 
generally  expressed,  it  is  the  ratio  for  a  particular  good  or  service 
of  the  average  demand  (in  the  sense  of  '*  demand  "  as  used  in 
economics)  through  a  period  of  time  to  the  greatest  demand  at 
any  one  time  within  the  period.  This  concept,  as  it  applies  in 
relation  to  the  commercial  supply  of  electric  energy,  will  be  dealt 
with  more  in  detail  below. 

It  is  the  purpose  of  this  article  to  discuss  not  the  load  factor  as 
such  but  rather  the  extent  to  which  a  consideration  of  the  prin- 
ciples involved  may  disclose  ideas  that  are  of  general  applica- 
bility in  economics.  We  owe  the  term  to  the  electrical  engineers. 
But  it  is  not  impossible  that  economists  will  prove  the  better 
interpreters  of  an  idea  that  relates  so  definitely  to  economic 
technology. 

^  American  Economic  Review,  vol.  V,  pp.  753-770.  Reprinted  by  permission  of 
American  Economic  Reoiew. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  593 

The  load-factor  concept  relates  to  a  very  important  subject  in 
economics  —  to  no  less  a  subject  than  the  variation  of  the  produc- 
tivity of  material  agents.  First  in  respect  of  both  date  of  dis- 
covery and  of  fundamental  importance  among  the  principles 
governing  the  variation  of  productivity  is  "  diminishing  returns." 
Second  is  the  economy  of  large-scale  production,  often  none  too 
aptly  referred  to  as  a  principle  of  "  increasing  returns."  We  are 
not  here  concerned  with  the  Hmitations  under  which  these  princi- 
ples operate,  but  it  should  be  noted  that  the  second  is  of  less 
general  significance  than  the  first.  The  "  load  factor  "  refers  to  a 
third  important  phase  of  the  variation  of  productivity,  distinct 
from  each  of  the  others,  though  perhaps  not  so  general  in  scope. 
In  brief,  cost  per  unit  of  product  varies  according  to:  (i)  the 
difficulty  of  obtaining  the  services  of  relatively  scarce  agents  of 
production;  (2)  the  magnitude  of  the  commercially  practicable 
scale  of  production;  and  (3)  the  degree  to  which  the  conditions 
of  economic  demand,  apart  from  maladjustment  of  the  supply  of 
productive  capacity,  permit  the  full  utilization  of  such  capacity. 
It  is  with  the  third  phase  of  the  variation  of  productivity  and  cost 
that  this  article  deals. 

The  terms  ordinarily  employed  to  designate  the  first  two  of 
these  factors  are  open  to  objection,  being  insufficiently  definite  in 
meaning  and  not  lending  themselves  to  generalization.  "  Dimin- 
ishing returns  "  and  "  increasing  returns  "  are  not  actually,  as  the 
words  suggest,  the  opposites  of  each  other,  for  in  tlie  one  case  the 
reference  is  to  a  given  area  of  land  (or  quantity  of  other  produc- 
tive agent)  and  in  the  other  to  the  unit  of  business  enterprise. 
Farms,  as  cultivated  more  or  less  intensively,  may  at  the  same 
time  exhibit  both  diminishing  returns  and  increasing  returns;  that 
is,  the  return  per  laborer  or  per  $1,000  of  capital  employed  upon 
the  land  may  be  relatively  smaller  on  the  more  intensively  culti- 
vated farms  than  on  those  under  less  intensive  cultivation,  but 
managers  may  find  more  scope  for  organization  and  directive 
ability  in  the  former  case  so  that  their  net  returns  are  greater 
than  in  the  latter  case.  The  combined  return  will  exhibit  the 
more  or  less  balanced  result  of  the  action  of  both  factors.  The 
commercial  value  of  services  and  products  has  no  necessary  con- 


594  BUSINESS  STATISTICS 

nectdon  with  the  phenomena  in  question,  though  it  happens  to  be 
convenient  to  measure  quantity  of  capital  in  terms  of  dollars.^ 

The  applicability  of  the  principle  of  diminishing  returns,  more- 
over, has  been  restricted  to  agricultural  land  by  the  classical 
economists  in  ways  that  are  of  practical  significance  as  well  as  of 
great  historic  interest.  Such  restrictions,  even  if  not  entirely 
logical,  inevitably  make  the  term  less  suitable  for  the  general 
concept. 

1  have  therefore  sought  other  names  for  the  two  familiar  factors 
in  the  variation  of  productivity,  and  will  in  general  refer  to  the 
first  as  the  proportionality  ^  factor;  to  the  second  as  the  density 
factor.  A  third,  of  course,  is  the  load  factor.  There  is  an  evident 
advantage  in  having  the  form  of  all  three  terms  thus  parallel. 

The  development  of  the  idea  of  diminishing  returns,  as  resulting 
from  relative  scarcity  of  land,  into  a  general  principle  exemplified 
wherever  there  is  deficiency  in  the  supply  of  any  of  the  means  of 
production,  or  lack  of  proportion  between  complementary  agents, 
has  come  about  quite  recently.  If  we  may  call  the  more  general 
conception  the  proportionality  factor,  ''  diminishing  returns  " 
properly  retains  its  time-honored  reference  to  land,  though  hardly 
to  merely  agricultural  uses  of  land.  Its  phenomena  are,  of  course, 
only  a  species  of  the  effects  of  the  proportionality  factor.  But 
the  most  important  species  may  well  have  its  distinctive  name. 

The  concepts  here  dealt  with  all  relate  to  economic  technology 
and  therefore  the  terms  used  should  not  suggest  a  different  sort  of 
thing.    It  might  seem  appropriate  to  call  the  second  the  concen- 

^  Commons,  for  instance,  in  his  Distribution  of  Wealth  (1893),  pp.  158-159, 
is  inclined  to  extend  the  principle  of  diminishing  returns  to  the  highest  degree  of 
generality  by  measuring  return  in  pecuniary  instead  of  physical  units.  This  in 
effect  confounds  diminishing  returns  with  diminishing  utility  and  deprives  the 
former  of  its  distinctive  content.    See  also  the  following  footnote. 

2  Cf.  Carver,  Distribution  of  Wealth  (1904),  p.  65,  where  "  proportions  "  is  used 
in  this  way.  Wicksteed,  Common  Sense  of  Political  Economy  (1910),  bk.  II,  ch.  5, 
acutely  criticizes  the  older  ideas  of  increasing  and  diminishing  returns  and  gives 
some  effective  illustrations  of  the  latter  as  a  matter  of  proportionality.  But  his 
statement  that  the  latter  is  a  "  sterile  proposition  "  is  ill-considered,  and  he  is  too 
ready  to  accept  pecuniary  measures  of  the  quantities  whose  variation  is  in  ques- 
tion as  sufficient.  Davenport,  in  Economics  of  Enterprise  (1913),  ch.  23,  discusses 
the  "  law  of  proportions  "  as  a  technological  as  well  as  a  pecuniary  matter,  though 
he  over-emphasizes  interpretation  in  terms  of  price. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  595 

tration  factor,  but  for  the  fact  that  this  could  easily  be  taken  to 
refer  to  the  financial  control  and  direction  of  industry  rather  than 
to  technological  aspects.  It  is  true  that  the  large-scale  manufac- 
turing plant  requires  the  concentration  in  one  spot  of  the  means 
of  supplying  a  large  area  or  an  extensive  market.  The  tendency 
is  not  ordinarily  apprehended  as  causing  density  in  the  geographi- 
cal distribution  of  the  processes  of  manufacture,  but,  once  pointed 
out,  the  fact  is  evident.  "  Concentration,"  moreover,  does  not 
suggest  what  happens  when  the  development  in  population  and 
industry  of  a  railroad's  territory  gives  it  more  traffic  and  larger 
profits.  Hence  "  density  factor  "  seems  to  be  the  term  most  gen- 
erally applicable  and  least  likely  to  be  misunderstood  in  referring 
to  the  second  principle.  "  Large-scale  production  "  in  its  nar- 
rower sense  is  not  intrinsically  objectionable  —  though  density 
rather  than  volume  of  transactions  is  what  is  really  important  — 
but  the  phrase  has  not  the  desired  parallelism  with  its  congeners 
and  it  also  has  been  applied  to  describe  "  combination  "  or  con- 
centration of  control,  which  is  a  different  matter  and  an  affair  of 
commercial  policy  rather  than  of  economic  technology.^ 

In  one  important  particular  the  scale  factor  is  different  from 
what  we  may  call  the  density  factor  in  the  narrower  sense.  The 
scale  on  which  an  ordinary  manufacturing  plant  is  constructed 
can  be  voluntarily  determined  with  reference  to  the  existing  or 
immediately  prospective  degree  of  condensation  of  demand  or  to 
the  "  extent  of  the  market."  In  the  case  of  services  rendered  in  a 
particular  locality,  on  the  other  hand,  the  capacity  of  the  plant 
will  most  likely  be  determined  chiefly  by  technological  considera- 
tions, and  its  full  utilization  will  wait  upon  the  growth  of  demand, 
which  in  turn  is  dependent  chiefly  upon  growth  of  population. 
Therefore  the  density  adjustment  is  in  this  case  largely  passive. 
When  there  is  a  material  product  susceptible  of  transportation, 
furthermore,  the  process  of  condensing  the  demand  from  larger 
and  larger  areas  facilitates  the  deliberate  exploitation  of  density- 
factor  economies  in  a  way  that  is  not  open  to  the  "  service  "  indus- 

1  Bullock's  term  for  the  effects  of  the  density  factor  is  "  the  law  of  economy  in 
organization  "  ("  The  Variation  of  Productive  Forces,"  Quarterly  Journal  of  Eco- 
nomics, vol.  XVI,  1901-1902,  p.  472). 


596 


BUSINESS  STATISTICS 


tries.  But  a  distinction  between  the  density  factor  and  the  scale 
factor  along  this  line  would  be  chiefly  a  matter  of  emphasis.  They 
are,  at  any  rate,  species  of  the  same  genus,  or  varieties  of  the 
same  species. 

Condition  to  which  it  Relates 

Degree  to  which  rela- 
tive quantities  of  various 
economic  agents  used  in 
conjunction  with  one  an- 
other are  strained,  espe- 
cially with  reference  to 
the  crowding  of  specific 
quantities  of  the  most 
costly  ones. 


Designation  of  Principle 
Proportionality  factor 
Diminishing  returns 


How  Dealt  with  Practically 

Tendency  to  increase 
in  unit  cost  held  in  check 
or  reduced  by  substitutes 
and  by  straining  the  pro- 
portion in  which  agents 
are  best  combined. 


Density  factor 
Extent  of  the  market 
Increasing  returns 
Large-scale  production 
Economy    of    organi- 
zation 


Degree  to  which  the 
quantity  of  the  product 
demanded  at  a  given 
place  admits  of  or  pro- 
motes the  most  economi- 
cal organization  and  scale 
of  operations. 


The  advantages  of  low- 
er unit  cost  are  gained  by 
transporting  the  product 
greater  distances  or  they 
develop  automatically  with 
increasing  density  of  popu- 
lation or  increasing  general 
purchasing  power.  Price 
differentiation  is  to  some 
extent    used    to   promote 


Load  factor 


Degree  to  which  condi- 
tions of  demand  and  the 
cost  of  keeping  products 
permit  continuous  opera- 
tion of  plant  and  of  in- 
dividual machines,  etc. 


Invention  and  applica- 
tion of  means  of  storage. 
Diversity  of  uses  develops 
along  with  density  to  a 
considerable  extent  auto- 
matically, but  especially 
price-differentiation  is  de- 
liberately employed  to 
smooth  out  and  promote 
the  continuity  of  demand. 
Educating  the  consumer 
to  greater  regularity  in 
purchasing  counts  for 
something. 

Whether  it  is  desirable  to  make  a  distinction  between  the 
density  factor  and  the  scale  factor  is  important  in  this  connection 
only  in  relation  to  the  use  of  the  former  term  in  the  more  general 
sense.     Mass  is  the  product  of  density  times  volume,  density 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  597 

being  a  ratio.  But  "  place  "  must  be  taken  in  a  liberal  sense  in 
economics,  according  to  which  sense  scale  (or  mass)  and  density 
become  practically  synonymous.  With  reference  to  the  density 
factor,  condensation  relates  not  to  a  given  area,  still  less  to  a 
given  number  of  cubic  feet,  but  to  a  "  place  "  that  may  include 
any  convenient  number  of  contiguous  or  associated  acres,  the 
limits  of  the  place  being  determined  merely  by  the  possible  extent 
of  one  management. 

The  relation  between  the  three  factors  is  summarized  in  the 
tabular  statement  above. 

The  Load  Factor  in  Relation  to  the  Supply  of  Electric  Energy 

The  term  "  load  factor  "  was  invented  and  its  use  has  developed 
in  connection  with  electrical  supply.  The  load  factor  is  always, 
either  explicitly  or  by  implication,  a  determining  consideration  in 
electrical  rate  making.  The  term  has  been  rather  loosely  used. 
The  authoritative  definition  of  the  Standards  Committee  of  the 
American  Institute  of  Electrical  Engineers  adopted  by  the  Insti- 
tute is:  "  The  load  factor  of  a  machine,  plant,  or  system  is  the 
ratio  of  the  average  power  to  the  maximum  power  during  a  certain 
period  of  time."  It  should  be  noted  that  the  reference  is  to 
economic  determinants,  that  is,  to  conditions  governing  the 
variation  of  demand,  without  more  relation  to  generating  capacity 
than  is  involved  in  the  assumption  that  it  is  sufficient  to  meet  the 
maximum  requirement. 

The  connection  between  the  load  factor  of  a  central  station  and 
the  kilowatt-hour  burden  of  the  charge  for  fixed  capital  is  evident. 
The  load-factor  ratio  may  be  stated  as  a  ratio  (per  cent)  or  as 
a  certain  number  of  hours'  use  of  the  maximum  demand.  In 
something  like  this  latter  form,  that  is,  as  average  hours'  use  per 
day  of  connected  installation,  it  is  frequently  explicit  in  electrical 
rate  schedules.  But  the  consumer's  connected  load,  or  some 
defined  fraction  of  it,  is  usually,  in  this  application,  the  makeshift 
representative  of  the  second  term  of  the  load-factor  ratio.  It 
is  obvious  that  a  company  with  consumers  using  twice  as  many 
kilowatt-hours  as  the  consumers  of  another  company  having  the 
same  system  maximum  will  require  but  half  the  generating  capac- 


598  BUSINESS  STATISTICS 

ity  of  the  latter  per  kilowatt-hour  distributed  and  will  thus  be 
free  from  a  heavy  burden  of  fixed  charges,  to  mention  only  one 
element  in  the  consequent  saving. 

To  illustrate  the  range  of  variation  of  the  load  during  24  hours, 
we  may  cite  figures  for  the  New  York  Edison  system  in  Man- 
hattan and  The  Bronx.  Because  of  the  density  and  diversity  of 
the  consumption  of  electricity  in  this  territory,  the  range  of  varia- 
tion is  less  than  for  but  few  favorably  situated  companies.  The 
data  of  hourly  output  for  clock  hours  as  averaged  for  four 
December,  1913,  work  days  excluding  Saturday,  this  being  the 
period  of  heaviest  demand,  show  a  maximum  hourly  output  of  183 
per  cent  of  the  average  and  a  minimum  of  34  per  cent,  the  range 
of  variation  being  thus  149  points  per  cent.  The  diurnal  load 
factor  of  nearly  55  per  cent  (100/183)  is,  of  course,  exceptionally 
good.  The  annual  load  factor  of  the  system  in  19 13  was  about 
34  per  cent.i 

It  is  for  the  best  interest  of  an  electrical  company  so  to  adjust 
its  rates  that  consumers  at  off-peak  times  —  that  is  at  times  when 
the  load  is  light  or  at  any  rate  less  than  the  maximum  —  will 
obtain  some  benefit  from  the  comparatively  low  cost  per  kilowatt- 
hour  of  energy  supplied  to  them.  If  one  consumer  uses  electricity 
for  a  single  hour  a  day  and  another  for  five  hours,  and  if  their 
kilowatt  demand  or  utilized  connected  load  is  the  same,  the 
burden  to  the  company  on  account  of  the  fixed  investment  is  five 
times  as  great  per  kilowatt-hour  for  the  first  as  for  the  second 
consumer. 

The  above  paragraph  contains  a  hint  of  a  necessary  qualifica- 
tion. If  the  5-hour  consumer  takes  his  current  steadily  from  12 
noon  to  5  P.M.  and  the  i-hour  consumer  from  5  to  6  p.m.,  the 
company  is  benefited  rather  than  otherwise  by  the  nature  of  the 
demand  of  the  short-hour  user.  If  the  needs  of  the  long-hour 
consumer  were  of  decisive  importance  in  causing  the  investment 
to  be  made,  then  the  sixth-hour  consumer,  causing  no  additional 
investment,  might  be  said  not  to  impose  any  additional  cost  on 
account  of  capital  charges.    The  load  factor  of  an  individual  con- 

1  Vol.  Ill  of  the  Annual  Report  of  the  New  York  Public  Service  Commission  of 
the  First  District  for  igij,  p.  54,  The  data  for  the  preceding  comparisons  are 
shown  on  pp.  60-61  and,  in  more  available  shape,  in  Diagram  II. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  599 

sumer  does  not  sufficiently  determine  the  fixed  cost  he  imposes 
unless  his  maximum  load  or  the  peak  of  his  demand  comes  at  the 
same  time  as  does  the  system  peak. 

The  diversity  factor  takes  account  of  the  difference  in  time 
between  the  peak  of  the  demand  of  a  consumer  or  class  of  con- 
sumers and  that  of  the  central  station.  It  is  defined  by  the 
Standards  Committee  of  the  American  Institute  of  Electrical 
Engineers  as  "  the  ratio  of  the  sum  of  the  maximum  demands  of 
the  subdivisions  of  any  system  or  part  of  the  system  to  the  maxi- 
mum demand  of  the  whole  system  or  part  of  the  system  under 
consideration,  measured  at  the  point  of  supply  "  (that  is,  at  the 
common  point).  The  importance  of  diversity  to  the  theory  of 
rates  is  evident  from  the  illustration  above  given. 

It  is,  of  course,  the  peculiar  nature  of  the  commercial  supply 
of  electric  energy  that  has  led  to  the  development  and  use  of  load- 
factor  concepts  here  rather  than  elsewhere.  The  fundamental 
peculiarity  is  the  economic  impossibility  of  providing  electric 
energy  ahead  of  demand  and  storing  it  at  will  until  the  consumer 
wishes  to  use  it.  Most  goods  can  be  stored,  though  at  more  or 
less  cost.  Electric  energy  for  ordinary  use  cannot  be  economically 
stored  to  any  considerable  extent.  Hence  the  problem  of  the 
electrical  enterprise  is  so  to  develop  and  train  economic  demand 
that  it  will  largely  adjust  itself  to  the  conditions  of  supply  instead 
of,  by  its  arbitrariness,  increase  costs  in  a  way  that  must  ulti- 
mately react  to  the  disadvantage  of  the  consumer.  The  unit  cost 
of  interest  and  depreciation  is  not  correctly  calculated  when 
simply  prorated  over  the  kilowatt-hours  taken. 

Another  element  in  the  situation  which  favors  the  development 
of  load-factor  concepts  in  the  electrical  industry  rather  than  else- 
where is  the  very  large  portion  of  total  unit-cost  that  is  made  up 
of  carrying  charges  for  fixed  investment,  that  is,  of  interest  and 
depreciation.  In  respect  of  the  dominant  importance  of  capital 
(in  the  large  sense,  including  land)  as  compared  with  labor 
employed,  railroads  probably  rank  higher  than  any  important 
branch  of  manufactures.  But  this  ratio  is  almost  as  large  in  the 
electrical  industry  as  it  is  for  railroads.  For  hydro-electric  plants 
it  is  doubtless  often  much  larger. 


600  BUSINESS  STATISTICS 

The  central-station  electrical  industry,  furthermore,  is  con- 
spicuous for  a  very  high  rate  of  depreciation,  especially  so  if  this 
term  is  used  to  cover  obsolescence.  Hence  fixed  costs  per  unit  of 
product,  which  cannot  be  neglected  with  impunity  in  any  indus- 
try, are  of  greater  importance  in  the  electrical  branch  than 
anywhere  else. 

Why,  it  might  be  asked,  have  load-factor  concepts  developed 
in  connection  with  the  electrical  industry  rather  than  with  the 
railroads  ?  In  both  cases  we  find  highly  developed  systems  of 
differential  rates  that  seek  to  distribute  the  burden  of  fixed 
charges  unevenly  in  a  way  the  public  is  prone  to  think  unjust. 
The  dominant  importance  of  fixed  capital  is  the  fundamental 
factor  in  both  cases.  But  the  policies  at  the  foundation  of  the 
classification  of  freight  cannot  be  reduced  to  quasi-mathematical 
rules.  The  elasticity  of  the  demand  for  carriage  is  not  an  engi- 
neering but  an  economic  fact.  There  is  no  difference  in  physical 
cost  for  the  carriage  of  different  kinds  of  freight  of  given  weight 
and  bulk  for  equal  distances.  Differential  rates  have  been 
developed  in  order  the  more  fully  to  utilize  the  railroad  plant. 
But  the  policy  has  little  reference  to  time,  and  is  certainly  not 
primarily  intended  to  provide  work  at  slack  times.  The  time  ad- 
justment may,  if  necessary,  be  effected  by  delay  in  transmission. 
The  economic  nature  of  the  problem  appears  to  be  generically  the 
same  for  the  railroad  and  for  the  electrical  company  in  the  sense 
that  both  are  striving  fully  to  utilize  an  existing  plant,  but  in  the 
one  case  the  time  of  demand  is  of  little  importance  while  in  the 
other  it  is  all-important.  Of  course  the  elasticity  of  the  demand 
of  a  particular  class  of  users  of  electric  current  will  not  fail  to  be 
considered  by  an  electrical  company  in  determining  to  whom  low 
rates  shall  be  offered,  but  this  element  of  the  situation  is  generally 
quite  overshadowed  by  regard  for  load  and  diversity  factors. 

In  order  to  improve  its  load  factor,  an  electrical  company  will 
offer  low  rates  for  uses  that  normally  require  off-peak  service, 
especially  if  such  uses  are  new  and  developing.  Beginning  with 
street  lighting,  the  electrical-supply  business  has  gradually  ex- 
tended to  commercial  lighting,  domestic  lighting,  industrial  and 
other  motor  or  power  uses  (such  as  elevator  service),  storage 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  6oi 

battery  service  for  automobiles,  various  domestic  appliances,  and, 
finally,  refrigeration.  The  last-mentioned  is  perhaps  the  prospec- 
tive field  of  large  importance  next  to  be  occupied.  Electric  heat- 
ing on  a  sound  economical  basis  seems  to  be  a  thing  of  the  more 
remote  future.  Most  of  the  applications  mentioned,  especially 
the  later  ones,  have  been  favored  with  special  attention  and  low 
rates  by  electrical  companies. 

An  economic  interest  in  load  factors  need  not  take  us  further 
into  details.  It  is  the  purpose  of  this  paper  to  deal  with  the  gen- 
eralizability  of  such  concepts,  not  with  their  application  to  a 
particular  industry  or  community. 

It  is  worth  while  to  mention  in  this  connection  the  "  capacity 
factor."  This  may  be  defined  as  the  ratio  of  the  average  output 
of  a  given  period,  usually  a  year,  to  the  theoretical  potential  out- 
put, supposing  continuous  use  of  rated  capacity.  This  is  not  of 
peculiar  importance  to  the  electrical  industry.  Nor  is  it  of  theo- 
retical interest  for  the  study  of  load  factors.  The  idea,  however, 
serves  to  correct  a  possible  mistaken  inference  from  these  ratios 
as  ordinarily  computed.  No  electrical  plant  could  run  at  full 
capacity  for  every  hour  in  the  year.  When  there  is  no  available 
reserve  capacity,  the  reaHzed  capacity  factor  is  the  same  as  the 
load  factor.  The  greatest  physically  practicable  capacity  factor 
marks  the  limit  of  possible  utilization  —  supposing  load  and 
diversity  factors  so  ideal  that  operation  can  be  continuous  so  far 
as  thus  controlled  by  economic  conditions  —  under  existing  con- 
ditions of  engineering  technique.  The  capacity  factor  has  often 
been  confused  with  the  load  factor.  Sometimes  capacity  factors 
may  be  used  to  advantage  for  statistical  purposes  where  load 
factors  cannot  be  ascertained. 

Public  Service  other  than  Electrical  Supply 

The  applicability  of  the  load-factor  concept  to  a  given  enter- 
prise or  kind  of  business  depends  upon  two  conditions. 

First,  there  must  be  heavy  investment  in  fixed  capital.  It  is 
unnecessary  to  prove  or  illustrate  the  fact  that  modern  industry 
is  highly  "  capitalistic,"  in  this  sense  of  a  word  used  also  in  other 
senses,  and  that  it  tends  to  become  rapidly  more  so. 


6o2  BUSINESS  STATISTICS 

The  second  requirement  is  that  the  product  be  of  such  a  nature 
that  the  time  and  the  place  of  use  cannot  be  varied  at  will  to 
suit  the  notions  of  the  consumer.  Any  adjustment  there  may  be 
must  be  made  in  advance,  and  if  the  consumer  does  not  conform 
his  choices  to  expectations,  the  product  or  service  offered  fails 
of  its  economic  purpose.  It  must  be  used  "on  the  spot"  or  imme- 
diately where  and  when  it  is  made  available  for  consumption. 
"  Where  "  and  "  when  "  are,  of  course,  to  be  taken  in  an  eco- 
nomic and  elastic,  rather  than  a  metaphysical,  sense. 

The  enterprises  of  any  industry  that  meet  these  two  conditions 
have  load  factors,  and  their  unit  costs  vary  according  to  whether 
the  load  factor  is  good  or  bad. 

In  a  general  way  it  is  the  "  public  service  "  enterprises  which 
fulfill  the  above  requirements  in  the  highest  degree.  The  word 
"service"  here  may  be  taken  to  have  substantially  its  usual 
economic  sense.  It  is  especially  because  the  consumer  cannot 
exercise  an  effective  option  as  to  where  and  when  and  by  whom  he 
shall  be  served  that  such  enterprises  are  always  more  or  less 
monopolistic.  The  central-station  electrical  industry,  from  which 
the  term  load  factor  comes,  is  one  such.  All  transportation 
agencies  —  steam  railroads,  street  railroads,  the  merchant  marine 
—  belong  in  this  class.  The  service  of  merchant  ships  is  peculiar 
in  so  far  as  the  supply  may  be  adjusted  to  the  variations  of  de- 
mand throughout  all  portions  of  the  globe  that  are  accessible  to 
water  transportation.  In  this  case  the  "  when  "  of  the  service  is 
most  important  and  the  "  where  "  rather  incidental.  Gas  and 
(urban)  water  supply  —  though  in  these  cases  material  commodi- 
ties are  placed  in  the  hands  of  the  consumer  instead  of  the  supply 
being  strictly  a  service  —  constitute  another  class  of  public  serv- 
ice enterprises.  They  are  peculiar  in  that  the  gas  and  water  may 
be  stored.  There  is  thus  some  emancipation  from  the  time 
restriction  on  consumption.  The  telephone  and  telegraph  are 
definitely  and  unqualifiedly  of  the  "  service  "  class. 

It  is  often  assumed  that  there  is  something  about  the  political 
nature  of  public  service  corporations  that  constitutes  them  a  class 
by  themselves.  But  the  fundamental  reasons  why  they  are  quasi- 
public  or  "  affected  with  a  public  interest  "  are  economic.    Their 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  603 

monopolistic  power  (which,  however,  does  not  hold  of  the  mer- 
chant marine)  is  due  to  the  large  amount  of  fixed  capital  they 
require  and  to  the  impossibility  of  making  the  services  of  a  partic- 
ular enterprise  available  except  in  its  own  restricted  area.  Hence 
the  need  of  public  control  to  take  the  place,  in  part,  of  competition 
as  a  regulator  of  prices  and  of  the  quality  of  service.  The  fact, 
also,  that  the  consumer,  especially  the  small  consumer,  has  prac- 
tically no  choice,  but  must  be  served  by  the  one  corporation 
or  go  without,  makes  him  unable  to  protect  himself  against 
discrimination  and  unfair  treatment. 

On  the  side  of  the  company,  the  density  factor  and  the  load 
factor  give  the  railroad  or  other  pubUc  service  corporation  special 
incentives  to  differentiate  and  discriminate  in  their  charges. 
Hence  it  is  necessary  to  regulate  the  public  service  corporation 
with  reference  to  the  method  as  well  as  to  the  total  amount  of  its 
charges. 

The  supply  of  water  to  a  city  might  be  expected  to  be  a  par- 
ticularly significant  illustration  of  the  way  the  load  factor  works, 
because  the  commodity  apparently  costs  nothing  itself,  aside  from 
carrying  charges  for  fixed  capital  in  reservoirs  and  pipes  and 
similarly  invariable  expenses.  The  physical  commodity  is  to 
be  had  in  unlimited  quantity.  Pumping,  however,  is  usually 
required  and  this  is  a  variable  cost.  But  it  is  a  small  factor.  A 
city's  water  works  are  generally  owned  by  the  municipality. 
Therefore  the  prices  charged  may  or  may  not  conform  to  load- 
factor  principles  or  to  any  other  principles,  because  the  amount 
collected  may  be,  as  it  is  often  called,  a  '*  tax"  rather  than  a  price. 
The  problem  of  adjusting  rate  of  supply  to  rate  of  demand  in  this 
case  is  seasonal  and  due  not  so  much  to  the  variation  of  demand  as 
to  that  of  supply.  There  is  likely  to  be  tremendous  expenditure 
for  storage  accompanied  by  little  or  no  attempt  to  regulate 
demand,  not  even  to  the  extent  of  preventing  waste.  But  the 
reserve  supply  has  also  largely  an  insurance  function.  And  no 
adjustment  of  water  rates  should  restrict  the  use  of  water  for 
sanitary  purposes. 

The  peculiarity  of  the  relation  of  the  water  supply  to  demand 
will  become  more  important  as  water  comes  to  be  extensively 


6o4  BUSINESS  STATISTICS 

impounded  to  be  used  for  power.  In  connection  with  long  dis- 
tance transmission  by  electricity,  such  a  development  suggests 
hydro-electric  plants  on  a  great  scale.  For  such  plants  it  is 
recognized  that  the  load  factor  is  even  more  important  than  in 
central-station  service. 

In  telegraphic  service  the  night-letter  (off-peak)  business  at 
specially  low  rates  is  an  interesting  application  of  load-factor 
considerations.  Off-peak  ocean  cable  rates  are  also  being  tried. 
These  policies  are  adopted  with  the  express  purpose  of  lowering 
cost  by  improving  the  load  factor.  Emphasis  upon  such  matters, 
if  not  attention  to  them,  is  a  matter  of  recent  years. 

The  telephone  has  been  recognized  as  peculiar  among  public 
service  enterprises,  because  the  density  factor  that  increases  the 
proportion  of  profits  as  business  increases  does  not  seem  to  operate 
here  as  certainly  as  in  other  cases.  But  this  is  owing  to  the 
rather  unessential  circumstance  that  the  subscriber  was  originally 
taken  as  the  unit  of  service  instead  of  the  call.  The  present 
tendency  is  towards  measured  in  place  of  unlimited  service,  at 
least  in  large  cities,  where  the  rate  per  subscriber  is  in  effect 
merely  a  guaranteed  return.  The  pressure  of  the  daily  telephone 
peak  in  cities  is  of  great  importance,  since  an  overload  can  be 
taken  care  of  only  by  developing  human  capacity,  or  by  delay. 
Commercial  methods  of  depressing  the  peak  have  not  been 
developed. 

The  relation  of  the  load  factor  to  the  steam-railroad  rate 
schedule  is  rather  incidental  than  of  fundamental  importance 
because  the  density  factor  is  here  of  more  decisive  influence  than 
the  other.  Carrying  charges  for  fixed  capital  which  it  is  desired  to 
utilize  more  fully  are  still  the  controlling  element  in  the  situation. 
The  result  of  both  factors  is  differential  rates,  but  of  two  different 
types.  In  steam-railroad  practice  the  principal  aim  is  to  increase 
business  and  the  dominant  consideration  is  regard  for  what  the 
traffic  will  or  will  not  bear.  An  electrical  enterprise  is  also  inter- 
ested in  increasing  the  load  but  is,  or  should  be,  much  more  inter- 
ested in  equalizing  it.  A  railroad  may  double  its  freight  without 
any  appreciable  addition  to  its  investment  except  for  rolHng 
stock,  and  the  required  increase  for  that,  owing  to  the  oppor- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  605 

tunities  of  the  back  haul  and  of  partly  filled  cars,  may  be  much 
less  than  100  per  cent.  An  electrical  company  must  double  its 
generator  capacity  to  provide  for  such  additional  demand,  unless 
it  improves  its  load  factor.  Its  investment  for  transmission  and 
distribution  is  less  likely  to  be  much  affected,  thus  resembling  the 
track  and  roadway  of  a  railroad. 

But  the  load  factor  does  somewhat  affect  the  rate  policy  of 
railroads.  Excursion  rates  at  particular  seasons  are  explicable 
by  reference  to  it.  Differences  in  respect  of  the  load  factor  also 
are  doubtless  one  reason  for  a  higher  charge  for  passenger  service 
than  for  non-perishable  freight.  The  seasonal  variation  of  the 
amount  of  traffic  ^  is  one  consideration  in  freight  classification, 
but  this  is  no  doubt  governed  in  the  main  by  regard  for  the  density 
factor.  The  economy  of  fully  loaded  cars  and  of  longer  freight 
trains,  which  has  been  much  emphasized  of  late,  is  an  affair  of  the 
load  factor.  The  diurnal  variation  of  one  sort  of  passenger 
demand  is  important  for  steam  roads  terminating  in  large  urban 
centers  with  considerable  commuting  population.  Passenger 
stations  may  have  to  be  specially  adapted  to  the  volume  and 
character  of  commuter  traffic. 

In  street  railway  service  there  are  some  peculiarities  from  which 
the  usual  5-cent  flat  rate  may  distract  attention.  The  problem  of 
the  daily  traffic  peaks  or  "  rush  hours  "  is  familiar. ^  The  over- 
loading of  street  cars  to  meet  the  peak  is  less  restrained  by  physi- 

*  Cf.  Ripley,  Railroads;  Rates  and  Regulation,  p.  100,  for  an  illustration  of  the 
importance  of  this  factor  as  indicated  by  the  variation  of  gross  and  net  revenues 
from  month  to  month. 

2  It  is  of  interest  to  note  that  John  Hopkinson  —  to  whom  more  than  to  any 
other  individual  the  appreciation  by  electrical  men  of  the  importance  of  the  load 
factor  is  due  —  in  his  pioneer  discussion  uses  a  railway  illustration  to  make  clear 
his  meaning,  as  follows:  "  For  example,  the  Metropolitan  District  Railway  must 
be  prepared  to  bring  in  its  thousands  of  passengers  to  the  City  at  the  beginning  of 
the  day  and  to  take  them  back  in  the  evening,  and  for  the  rest  of  the  day  it  must 
be  content  to  be  comparatively  idle.  In  this  case  the  services  cannot  be  stored. 
The  line  must  be  of  a  carrying  capacity  equal  to  the  greatest  demand,  and  if  this 
be  great  for  a  very  short  time  the  total  return  for  the  day  must  be  small  in  com- 
parison with  the  expense  of  rendering  the  service.  In  such  a  case  it  would  not  be 
inappropriate  to  charge  more  for  carrying  a  person  in  the  busy  time  than  in  the 
slack  time,  for  it  really  costs  more  to  carry  him."  See  his  paper  "  On  the  Cost  of 
Electric  Supply  "  in  Original  Papers,  vol.  I,  p.  256. 


6o6  BUSINESS  STATISTICS 

cal  conditions  than  in  the  case  of  electrical  machines.  While  the 
careless  overioading  of  a  generator  harms  the  property  of  the 
corporation,  the  rush-hour  street  railway  overload  merely  causes 
discomfort  to  the  passengers.  Hence  the  perennial  plaint  of  the 
strap-hanger.  In  fact,  the  street  railway  cannot  economically 
give  the  same  grade  of  service  at  the  rush-hour  as  at  other  times. 
The  attempt  to  do  so  would  greatly  increase  unit  costs  for  such 
passengers.  The  street  railway  has  to  do  also  with  some  specifi- 
cally electrical  peak  problems,  but  they  are  comparatively 
unimportant  and  of  engineering  more  than  of  economic  interest. 

Investors  are  sometimes  misled  by  observing  the  conspicuous 
density  of  traffic  under  peak  conditions  into  providing  large 
amounts  of  capital  with  regard  to  such  conditions  rather  than  with 
regard  to  average  demand.  The  great  seasonal  demand  for  trans- 
portation from  New  York  to  Coney  Island,  for  example,  doubtless 
caused  the  too  rapid  supplying  of  facilities  for  this  traffic  some 
thirty  years  ago. 

Any  measure  that  will  effect  a  smoothing  of  the  transit  load  has 
great  economic  advantages.  Whether  hours  of  employment  of 
different  sorts  of  labor  could  be  adjusted  with  reference  to  this 
situation  is  an  interesting  question.  The  facetious  classification 
of  morning  commuter  traffic  as  consisting  successively  of  "  works, 
clerks,  and  shirks  "  has  an  element  of  interest  in  this  connection. 
The  adjustment  of  railway  rates  with  a  view  to  effecting  a  reduc- 
tion of  the  peak  —  daily,  weekly,  or  seasonal  —  would  doubtless 
encounter  a  good  deal  of  prejudice,  though  higher  Sunday  rates 
are  not  unknown. 

The  collection,  transportation,  and  delivery  of  mail  constitutes 
a  service  in  which  the  load  factor  is  of  great  significance.  Here 
the  labor  element  is  a  more  important  consideration  than  the  fixed 
capital  directly  involved.  But  promptness  of  service  is  of  first 
importance.  Hence  the  problem  of  the  Christmas  peak.  One 
reason  for  the  establishment  of  the  parcels  post  was  doubtless  the 
desire  to  use  more  fully  an  expensive  organization,  but  with  refer- 
ence to  the  density  factor  rather  than  the  load  factor.  Whether 
the  present  classification  of  postal  rates,  with  distance  disregarded 
except  for  parcel  service,  is  economically  sound  is  perhaps  ques- 


REPORTS  FOR  TEE  CHIEF  EXECUTIVE  607 

tionable.  It  is  merely  a  historical  product  and  not  well  thought 
out.^  The  extension  of  the  parcels  classification  to  books,  however, 
remedied  one  conspicuous  anomaly. 

Other  Business  Enterprises 

The  principle  once  grasped,  it  is  seen  that  the  load  factor  is 
significant  throughout  modern  industry,  though  it  does  not 
attract  attention  to  itself  by  a  peculiar  system  of  rates  or  prices 
except  in  electrical  supply. 

There  are  some  industries  in  which  continuous  operation 
throughout  the  24  hours  of  the  day  and  the  7  days  of  the  week  is 
practiced.  However,  this  involves  the  employment  of  two  or 
three  shifts  or  sets  of  laborers  and  night  work,  both  of  which 
conditions  count  against  such  a  continuous  use  of  fixed  capital. 
Hence  where  24-hour  work  is  the  rule,  some  other  consideration 
than  economical  use  of  capital  dominates  the  situation.  It  is,  for 
example,  only  an  incidental  and  minor  advantage  of  the  running 
of  blast  furnaces  24  hours  a  day  that  by  such  continuous  use  there 
is  some  small  saving  of  interest  cost.  The  ordinary  manufac- 
turing plant,  a  cotton  factory,  for  example,  resorts  to  night  work 
only  when  there  is  pressure  of  unusual  demand. 

In  the  case  of  the  ordinary  factory,  the  problem  of  the  full 
utilization  of  capital  is  a  question  of  what  to  do  in  slack  times, 
especially  slack  seasons.  The  retention  of  a  trained  labor  force 
through  the  dull  season  is  often  an  important  consideration. 
Manufacturing  ''  for  stock  "  is  of  course  the  ordinary  recourse, 
but  the  determination  of  how  far  this  process  shall  be  carried,  or 
of  what  selling  and  other  devices  may  be  adopted  to  prevent  the 
accumulation  of  too  large  a  stock,  comes  up,  and  is  indeed  sub- 
stantially the  same  old  load-factor  problem  in  its  seasonal  aspect. 
If  the  product  of  the  factory  is  not  a  standard  article  but  is  subject 
to  the  caprice  of  fashion,  it  does  not  pay  to  manufacture  much 
ahead  of  actual  orders.  Thus  throughout  the  field  of  manufactur- 
ing, although  continuous  utilization  through  the  hours  of  the  day 
is  seldom  to  be  considered,  the  seasonal  load  factor  is  important. 

^  The  report  of  the  Commission  on  Second  Class  Mail  Matter  (transmitted  to 
Congress  February  22,  191 2)  shows  this  among  other  things. 


6o8  BUSINESS  STATISTICS 

It  happens  that  New  Jersey's  Bureau  of  Statistics  of  Labor 
and  Industries  gathers  and  publishes  some  statistics  indicative  of 
load-factor  conditions  in  various  branches  of  manufacture.  The 
ratios  are  really  capacity  factors,  but  they  illustrate  the  point 
under  discussion.  In  the  1910  figures,  which  are  the  ones  at  hand, 
the  average  figure  for  all  industries  was  74.92  per  cent  and  for 
twenty-five  specified  industries  74.00  per  cent.^  The  minimum 
ratio  was  64.42  per  cent,  for  structural  steel  and  iron,  and  the 
maximum  88.12  per  cent,  for  paper.  These  figures  are  doubtless 
based  upon  the  use  of  the  plant  by  a  single  set  of  workmen,  with- 
out alternating  shifts,  and  for  the  usual  number  of  working  days 
in  the  year,  such  use  being  rated  100  per  cent. 

The  Massachusetts  Bureau  of  Statistics  publishes  similar  data 
for  "  days  in  operation."  ^  The  following  is  quoted  from  the 
report  for  19 10:  — 

In  1910,  exclusive  of  Sundays  and  holidays,  there  were  305  working  days, 
and  all  of  the  important  industries  reported  short  time  to  a  greater  or  less 
extent  for  the  year.  Establishments  in  the  boot  and  shoe  industry,  exclusive 
of  cut  stock  and  findings,  were  operated  on  an  average  of  283  days;  cotton 
goods,  including  cotton  small  wares,  280  days;  foundry  and  machine  shop 
products,  296  days;  leather,  tanned,  curried,  and  finished,  282  days;  paper 
and  wood  pulp,  274  days;  and  woolen,  worsted,  and  felt  goods,  and  wool 
hats,  271  days.  Establishments  manufacturing  electrical  machinery,  appa- 
ratus, and  supplies,  were  operated  297  days,  and  jewelry  establishments 
about  287  days.  In  some  of  the  smaller  industries,  such  as  malt  liquors, 
show  cases,  and  musical  instruments  and  materials,  not  specified,  we  find 
practically  continuous  employment.  On  the  other  hand,  in  brick  and  tile,  a 
seasonal  industry,  the  establishments  were  operated  only  about  half  time,  or 
153  days  on  an  average.  Lumber  and  timber  products  show  an  average  of 
247  days. 

Reduced  to  terms  of  per  cent  these  figures,  in  order,  are  as  fol- 
lows: 92.8,  91.8,  97.0,  92.5,  89.8,  88.9,  97.4,  94.1,  50.2,  81.0. 
These  ratios  are,  of  course,  not  directly  comparable  with  a 
central-station  load  factor. 

It  has  already  been  intimated  that  these  are  strictly  a  species. 
of  capacity  factor,  rather  than  load-factor  figures,  and  that  the 
conception  of  continuous  operation  underlying  them  needs  to  be 

*  P.  31  of  the  annual  report  for  191 1.  The  ratio  is  termed  the  "  proportion  of 
business  done." 

2  Twenty-fifth  Annual  Report  on  Statistics  of  Manufactures,  p.  xxvii. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  609 

made  explicit.  Doubtless  a  large  proportion  of  manufacturing 
establishments  have  some  reserve  capacity  to  provide  for  future 
growth.  The  only  suggestion  the  figures  themselves  contain  as 
to  what  allowance  should  be  made  for  this  is  that  possibly  the 
largest  average  ratio  for  an  industry  would  fall  short  of  100  per 
cent  only  by  the  average  amount  of  the  reserve  in  question,  and 
that  this  reserve  ratio  would  vary  only  slightly  as  between  the 
averages  of  the  different  industries.  But  the  strict  annual  load 
factor  would  take  no  account  of  fluctuations  of  demand  due  to 
"  trade  cycles  "  covering  several  years,  though  this  rather  than 
the  seasonal  variation  may  be  of  most  importance  in  causing  an 
uneven  and  usually  short  load  for  efficient  manufacturing  plants. 

Though  not  so  named,  the  diversity  factor  is  very  commonly  of 
recognized  importance  in  ordinary  business,  and  its  importance 
presupposes  the  importance  of  the  load  factor.  One  advantage  of 
the  department  store  over  the  specialty  "  shop  "  is  that  it  can 
shift  the  disposition  of  space  and  clerical  force  according  to  the 
season's  needs,  thus  improving  its  annual  load  factor.  The  profit- 
ableness of  commercial  banking  is  entirely  dependent  upon  the 
diversity  of  the  demands  of  depositors  for  funds.  A  reserve  of 
$100,000  will  under  most  circumstances  easily  meet  aggregate 
possible  demands  five  times  as  great. 

The  variation  of  demand  may  be  weekly,  but  if  this  is  a  matter 
of  a  Saturday  afternoon  and  Sunday  discontinuation  of  opera- 
tions, that  is  no  more  thought  of  than  shutting  down  over  night. 
If  the  variation  is  the  reverse  of  this,  so  that  there  is  a  marked 
Sunday  peak,  then  the  effect  is  likely  to  be  noticed  in  a  stiffening 
or  increase  of  prices.  Reasoning  rather  short  sightedly,  the  pub- 
lic is  likely  to  think  that  any  such  increase  in  unit  prices  at  the 
period  of  largest  demand  is  extortionate.  We  cannot  be  sure  that 
under  these  circumstances  the  commercial  motive  will  not  lead  to 
attempting  to  make  too  much  of  the  opportunity,  but  there  is  also 
the  other  side  of  the  matter,  namely,  the  question  as  to  what  can 
be  done  with  the  investment  and  the  time  of  those  engaged  during 
the  unprovided  for  five  or  six-sevenths  of  the  week.  Such  sixth 
or  seventh-day  enterprises,  however,  are  often  merely  auxiliary 
occupations  and  even  the  undertakings  of  children.    The  holiday 


6lO  BUSINESS  STATISTICS 

sale  of  drinks,  fruit,  and  confections  in  suburban  "  park  "  resorts 
is  the  most  conspicuous  instance  of  this  sort  of  thing.  But  this 
graduates  into  restaurant  and  hotel-keeping  for  similarly  variable 
weekly  and  seasonal  demands. 

Not  long  ago  a  certain  London  hotel  advertised  the  quality  of 
its  service  as  being  the  best  obtainable  because  its  good  load 
factor  so  reduced  its  average  costs.  Whether  this  is  as  good 
advertising  as  it  is  good  economics  may  be  doubted.  It  certainly 
is  true  that  the  price  for  a  hotel  supplying  the  needs  of  transients 
cannot  be  other  than  high  according  to  a  close  comparison  of  the 
actual  with  the  theoretically  possible  use  of  the  investment. 
Hence  Swiss  mountain  hotels  and  Jersey  coast  resorts,  once 
thought  of  merely  as  places  to  go  in  summer,  are  now  trying  to 
develop  winter  trade  and  thus  to  utilize  what  would  otherwise  be 
idle  plant.  Some  nondescript  statistics  that  happen  to  be  at 
hand  for  Swiss  hotels  in  1906  show  monthly  capacity  load  factors 
(beds  used  to  beds  available  per  night)  of  76  per  cent  for  August 
as  compared  with  14  per  cent  for  December.  The  Adirondack 
hotels  also  are  now  seeking  winter  guests.  If  we  may  believe  the 
advertisers,  "  all-the-year-round  "  resorts  are  coming  to  be  the 
usual  kind. 

In  view  of  the  inevitably  low  degree  of  utilization  possible, 
what  vanity  is  it  that  makes  the  traveler  seek  luxuries  in  hotel 
accommodations  that  he  cannot  afford  at  home  ?  Decorations  and 
appliances  that  will  be  idle  250  days  in  the  year  must  require 
triple  or  quadruple  recompense  for  the  100  days  of  use.  The 
American  weakness  for  having  "  the  best  of  everything,"  always 
traveling  "  first  class  "  and  going  to  the  "  best  hotels,"  imposes  a 
tax  that  only  a  very  prosperous  people  could  stand. 

It  is  because  of  the  load  factor  that  one  can  get  a  better  lunch  at 
a  restaurant  which  is  also  a  saloon  than  at  one  which  meets  the 
demand  for  light  noonday  meals  chiefly  and  for  occasional  evening 
dinners  or  suppers,  and  whose  plant  is  otherwise  unutilized  for 
most  of  the  24  hours. 

Since  the  variation  of  the  seasons  is  the  fundamental  condition 
of  plant  growth,  one  would  expect  load  factors  to  be  especially 
important  in  agriculture.     In  this  case  it  is  the  ''  industrial " 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  6ll 

demand  for  uses  of  means  of  production  that  varies,  not  the 
demand  of  consumers  for  final  products.  Fixed  capital  used  in 
agriculture  has  a  poor  load  factor  because  the  seasons  restrict  the 
use  of  any  kind  of  agricultural  machinery  to  a  particular  portion 
of  the  year.  This  holds  even  where  one  farmer  does  the  reaping 
and  binding  for  several  neighbors.  Threshing  and  hay  pressing 
are  less  restricted,  the  former  lasting  all  the  autumn,  the  latter 
possibly  also  through  the  winter.  Probably  the  chief  reason  why 
agriculture  is  carried  on  to  so  great  an  extent  with  poverty  of 
apphances  is  because  the  load  factor  for  capital  used  is  so  unfavor- 
able. Farming  cannot  economically  be  capitalistic,  in  one  sense 
of  the  word,  to  the  same  degree  as  the  manufacture  of  cloth,  for 
example.  A  seeder  that  is  passed  around  among  neighbors  and 
used  by  some  of  them  at  not  just  the  right  time  is,  even  then,  of 
use  only  during  the  good  days  of  a  single  month  or  six  weeks  in  the 
year. 

In  certain  kinds  of  demand  there  is  no  recurrence  of  need. 
Under  such  circumstances  it  is  impossible  to  compute  a  load 
factor,  because  that  supposes  a  period  of  use  and  a  permanent 
investment.  But  the  economic  interest  in  this  case  is  of  the  same 
nature  as  in  the  case  of  a  recurrent  peak.  The  price  paid  for  the 
use  of  a  grand  stand  to  view  a  parade  must  be  very  large  in  pro- 
portion to  the  investment.  Pageants  and  spectacles  are  similarly 
costly.  Hotel  accommodations  for  large  crowds  at  expositions 
and  political  conventions  should  not  be  expected  "  at  regular 
rates."  Monopolistic  exploitation  of  such  conjunctures,  unfor- 
tunately, is  much  more  likely.  But,  in  the  case  of  specially 
provided  accommodations,  there  should  be  some  allowance  of 
extra  return  (in  case  the  enterprise  is  successful)  on  account  of 
economic  risk. 

The  attempt  to  get  a  high  price  for  a  brief  seasonal  or  tempo- 
rary use  of  capital  often  leads  to  angry  protests  against  so  taxing 
the  peak.  The  summer  demand  for  extra  ice  and  for  bathing 
accommodations  affords  familiar  examples.  Public  opinion  may 
easily  expect  too  much  of  dealers  in  hot-weather  necessaries. 
Holiday  travel  is  sometimes  similarly  taxed.  In  all  these  matters 
the  responsible  managers  of  business  enterprises  occasionally 


6i2  BUSINESS  STATISTICS 

forget  that,  even  if  the  public  is  somewhat  prejudiced  —  and 
dealers  are  not  the  best  judges  on  this  point  —  what  is  bad 
business  policy  cannot  in  the  long  run  be  good  practical  eco- 
nomics. 

VI.  Statistical  Reports  of  the  Utah  Consolidated 
Mining  Company  ^ 

By  W.  H.  Charlton 

In  the  Bingham  Mining  District  of  Utah,  the  ore  bodies  are  found 
as  irregular  replacements  in  limestone. 

The  ores  of  the  district  contain  values  in  copper,  gold,  silver, 
lead,  and  zinc. 

At  the  present  time  the  commercial  activity  of  the  camp  is 
centered  on  the  copper-iron  sulphide  ores  mainly,  with  lead-silver 
sulphides  receiving  second  consideration. 

The  Highland  Boy  mine  of  the  company  is  opened  with  five 
tunnels,  driven  into  the  mountain  at  as  many  levels,  along  the 
strike  of  the  out-crop.  These  tunnels  are  connected  by  both 
vertical  and  inclined  shafts,  equipped  with  ladderways  and  ore 
chutes,  to  facilitate  underground  operations. 

Drifts  and  cross-cuts  are  run  into  the  ore  bodies  at  convenient 
places  from  the  different  tunnels.  The  ore  is  broken  down  in  the 
stopes  with  the  aid  of  machine  drills  actuated  by  steam  power. 
The  ore  is  then  chuted  down  to  the  lowest  tunnel  level  and  loaded 
into  tramcars  to  be  run  out  to  the  head-house  in  trains  of  ten 
cars  each,  where  it  is  loaded  into  the  buckets  of  an  aerial  train  for 
transportation  about  two  miles  down  the  canyon  to  the  railroad, 
to  be  shipped  to  the  smelter  for  treatment. 

The  Utah  Consolidated  Mining  Company  uses  the  graphic 
system  of  recording  data.  This  graphic  method  soon  indicates 
the  point  that  must  be  specially  investigated  and  as  a  consequence 
the  use  of  graphic  methods  has  been  attended  by  a  steady  increase 
in  the  amount  of  detailed  information  gathered. 

While  the  system  is  quite  comprehensive  and  takes  in  many 
ramifications  of  the  work,  as  will  be  seen  when  the  details  are 

^  W.  H.  Charlton,  American  Mine  Accounting,  pp.  149-167.  Reprinted  by  per- 
mission of  McGraw-Hill  Book  Company.    Illustrations  of  forms  are  omitted. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  613 

given,  still  the  introduction  has  been  so  timed  that  the  men 
gradually  accustomed  themselves  to  the  system  and  the  exten- 
sions have  been  so  logical  that  no  trouble  has  arisen.  Besides, 
while  the  work  as  will  be  seen  covers  much  detail,  the  gathering 
of  the  detailed  information  and  the  methods  of  recording  it  in 
tables  have  been  so  simplified  that  the  plotting  and  tabulating  is 
done  by  two  men  who  keep  up  the  details  of  the  geology  in  the 
stopes  as  well  as  planning  and  looking  after  all  development  work 
and  inspecting  the  principal  stopes  each  day  for  changes  in 
geology.  In  a  mine  consisting  of  a  series  of  irregular  ore  shoots 
in  a  fractured  and  dislocated  country  the  amount  of  geological 
work  is  necessarily  quite  large. 

Of  course  this  matter  of  keeping  track  of  details  can  be  carried 
to  an  extreme,  and  might  possibly  become  more  of  a  detriment 
than  an  aid,  were  it  not  that  the  graphic  method  soon  indicated 
the  important  points  to  watch  in  each  operation  and  what  details 
may  well  be  omitted  as  the  system  is  extended. 

In  order  to  keep  the  graphic  records  it  is  necessary  for  several 
men  to  collect  the  data  that  is  used  in  preparing  them.  To 
render  this  easier  and  to  simplify  the  work  as  well  as  to  have  the 
records  imiform,  practically  everything  is  recorded  on  printed 
forms. 

Exploring.  This  account  is  intended  to  cover  all  cost  including 
labor  and  supplies  incident  to  exploring  new  ground. 

Development.  This  account  is  intended  to  cover  all  cost  includ- 
ing labor  and  supplies  incident  to  the  development  of  known  ore 
bodies. 

Shafts  and  Tunnels.  This  account  is  intended  to  cover  all  cost 
including  labor  and  supplies  in  the  sinking  of  new  shafts  and  the 
driving  of  new  drifts. 

Stoping.  This  account  is  intended  to  cover  the  total  cost 
including  labor  and  supplies  of  breaking  ore  in  stopes. 

Tramming.  This  account  is  intended  to  cover  all  cost  including 
labor,  supplies  and  power  for  tramming  by  hand  and  by  power. 

Hoisting.  This  account  is  intended  to  cover  all  cost  including 
labor,  supplies  and  power  to  operate  and  maintain  both  engine 
houses,  hoists,  pulley  stands,  etc. 


6i4  BUSINESS  STATISTICS 

Pumping.  This  account  is  intended  to  cover  all  cost  including 
labor,  supplies  and  power  to  operate  and  maintain  all  pumps 
and  water  lines  underground. 

Timbering.  This  account  is  intended  to  cover  all  cost  of 
handling,  framing  and  placing  in  the  mine  all  timber  used  under- 
ground.   It  does  not  include  the  cost  of  the  timber  used. 

Mine  Ledgers  —  Operating  Accounts 


Distributed  Accounts 

Expense  Accounts 

Closed  Accounts 

Shop  Accounts 

Exploring 

Boilers 

Machine  Shop 

Development 

Compressor 

Blacksmith  Shop 

Shafts  and  Tunnels 

Electric  Lights 

Carpenter  Shop 

Stoping 

Heating 

Tramming 

Fuel 

Hoisting 

Explosives 

Pumping 

Lumber  and  Timber 

Timbering 

Teaming  Timber 

Cars  and  Tracks 

Supplies 

Operating  Tramway- 

Surface  Waste 

New  Tramway 

General  Office 

Machinery 

T-ahoratory  and  Eng.  Dept. 

Surface  Expense 

Buildings  and  Fixtures 

General  Expense 

Cars  and  Tracks.  This  account  is  intended  to  cover  the  cost 
and  installation  of  new  cars  and  permanent  track,  but  does  not 
include  the  cost  of  replacing  old  cars  with  new  ones. 

Operating  Tramway.  This  account  is  intended  to  cover  all  cost 
including  labor  and  supplies  of  operating  and  maintaining  the 
tramway. 

New  Tramway.  This  account  is  intended  to  cover  all  cost 
including  labor  and  supplies  of  building  new  tramways  and 
trestles,  but  not  repairs  to  old  ones. 

Machinery.  This  account  is  intended  to  cover  all  cost  including 
labor  and  supplies  to  cover  the  purchase  and  installation  of  new 
machinery. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  615 

Laboratory  and  Engineering  Department.  This  account  is  in- 
tended to  cover  all  cost  including  labor  and  supplies  for  running 
the  laboratory  and  doing  all  engineering  work. 

Surface  Expense.  This  account  is  intended  to  cover  all  cost 
including  labor  and  supplies  of  odd  jobs  about  the  property  that 
cannot  legitimately  be  charged  to  other  operating  accounts. 

Buildings  and  Fixtures.  This  account  is  intended  to  cover  all 
cost  of  new  buildings  and  fixtures,  but  does  not  include  the  upkeep 
of  old  buildings. 

General  Expense.  This  account  is  intended  to  cover  all  cost  of 
odd  jobs  underground. 

Boilers.  This  account  is  intended  to  cover  the  cost  of  operating 
and  maintaining  the  boiler  plant.  It  is  closed  out  each  month  to 
the  various  accounts  benefited  on  a  basis  of  horse  power  used. 

Compressor.  This  account  is  intended  to  cover  the  cost  of 
operating  and  maintaining  the  compressor  plant.  It  is  closed  out 
each  month  to  the  various  accounts  benefited  on  a  basis  of 
quantity  of  air  used. 

Electric  Lights.  This  account  is  intended  to  cover  the  cost  of 
operating  and  maintaining  the  electric  generating  plant.  It  is 
closed  out  to  the  various  accounts  benefited  on  a  basis  of  current 
used. 

Heating,  This  account  is  intended  to  cover  all  cost  of  operating 
and  maintaining  the  heating  plant.  It  is  closed  out  each  month 
to  the  various  accounts  benefited. 

Fuel.  This  account  is  intended  to  cover  all  cost  of  coal  includ- 
ing freight  and  unloading  charges.  It  is  closed  out  to  the  accounts 
benefited  on  a  basis  of  tons  used. 

Explosives.  This  account  is  intended  to  cover  the  cost  of  explo- 
sives and  is  closed  out  each  month  on  a  basis  of  power  used. 

Lumber  and  Timber.  This  account  is  intended  to  cover  the  cost 
of  lumber  and  timber,  also  wedges  and  mine  ladders  used.  It  is 
closed  out  each  month  to  the  various  accounts  benefited  according 
to  the  cost  of  supplies  used. 

Teaming  Timber.  This  account  is  intended  to  cover  the  cost  of 
teaming  timber  to  the  mine  shafts.  Labor  charges  only.  It  is 
closed  out  each  month  to  the  various  accounts  benefited  on  a 
basis  of  supplies  used. 


6l6  BUSINESS  STATISTICS 

Supplies.  This  account  is  intended  to  cover  the  cost  of  sup- 
plies used  not  otherwise  provided  for  and  is  closed  out  each 
month  to  the  various  accounts  benefited  according  to  the  cost  of 
supplies  used. 

Surface  Waste.  This  account  is  intended  to  cover  all  cost  of 
filling  stopes  from  surface  waste.  The  whole  account  is  closed 
into  Stoping. 

General  Office.  This  account  is  intended  to  cover  all  cost  and 
expense  covering  the  office  and  superintendence. 

All  these  accounts  are  further  itemized;  for  instance,  the 
Stoping  account  is  subdivided  as  follows:  Labor,  Supplies,  3-B 
Rand  parts,  21  inches.  Rand  parts,  2i  inches,  Sullivan  parts,  o-D 
Rand  parts,  total  of  all  the  above  supplies.  All  these  are  appor- 
tioned from  the  storehouse  account.  Powder  ij  inches,  30  per 
cent,  li  inches,  40  per  cent,  and  i  inch,  30  per  cent,  fuse,  caps,  all 
are  apportioned  from  the  powder  account.  Next  comes  lumber 
and  timber,  portion  used  in  stopes.  Then  comes  the  shops  and 
compressor  items,  under  which  are  charged  the  proportion  from 
these  accounts.  Timbering  and  Surface  Waste  items  cover  the 
cost  of  putting  in  timbers  and  filling  the  stopes  with  surface 
waste,  respectively,  and  are  charged  directly  to  stoping  and  are 
not  distributed  accounts. 

The  total  tons  mined  and  the  total  cost  of  stoping  are  figured, 
and  then  from  these  the  cost  per  ton  calculated. 

Tonnage  and  Labor  Chart.  The  most  important  graphic  record 
is  the  tonnage  and  labor  chart  which  is  posted  in  the  main  office 
where  every  one  can  see  it  and  where  it  is  studied  by  the  shift 
bosses,  the  foremen  and  the  other  mine  officials.  On  this  labor 
chart  in  plotting  the  tonnage  a  scale  of  one  hundred  tons  to  an 
inch  vertically  is  used,  while  the  days  are  plotted  at  intervals  of  an 
inch.  This  plotting  is  done  on  ten  scale  paper.  This  scale  is  good 
for  the  Highland  Boy  Mine,  where  the  tonnage  for  a  day  does  not 
fluctuate  more  than  two  hundred  tons.  A  curve  is  plotted  for  the 
day  shift  tonnage  and  also  one  for  the  night  shift,  then  the  total 
tonnage  for  the  two  shifts  is  plotted  and  also  the  total  tonnage 
sent  over  the  tramway.  This  tramway  tonnage,  as  has  been  said 
before,  is  the  most  accurate  of  all  tonnages.    The  tonnage  mined 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  617 

IS  plotted  from  the  estimated  weight  of  a  car  of  ore  and  the  num- 
ber of  cars  sent  out  by  that  shift.  At  first  there  were  large 
variations  between  the  mine  tonnage  and  the  tramway  tonnage. 
Now  the  mine  tonnage  and  the  tramway  tonnage  are  quite  close 
together,  rarely  differing  more  than  fifty  tons  in  a  daily  output  of 
eight  hundred  tons.  The  fact  that  this  report  made  the  men  load 
the  cars  full  has  more  than  paid  for  the  trouble  in  keeping  the 
reports.  Pay  day  and  delays  are  shown  by  the  corresponding 
sags  in  the  tonnage  Hues. 

Below  the  tonnage  lines  and  on  the  same  chart  are  plotted  the 
number  of  machines  working  each  day.  In  doing  this  a  vertical 
scale  of  five  machines  to  the  inch  is  used.  Curves  to  represent  the 
total  number  of  machines  in  use,  the  machines  in  ore  and  the 
machines  on  waste  are  plotted.  Below  this  are  plotted  the  labor 
figures.  The  scale  used  is  ten  men  to  the  inch.  Curves  are 
plotted  for  the  total  men  employed  and  the  total  men  employed 
underground.  At  the  bottom  is  plotted  the  tons-per-man  curve. 
These  are  on  a  scale  of  one-half  ton  to  an  inch  vertically.  One 
curve  shows  the  tons  mined  per  man  underground  and  another 
the  tons  mined  per  man  employed  about  the  mine  both  above  and 
below  ground.  A  scale  of  one  ton  to  an  inch  was  tried,  but  this 
was  found  to  be  too  small  a  scale  to  show  variation  sufficiently 
striking. 

On  this  tonnage  and  labor  chart  the  most  important  figures  in 
mining  are  clearly  shown  so  that  every  one  can  readily  see  how 
efficient  the  work  at  the  mine  is. 

Probably  there  is  no  better  way  to  get  cheap  costs  than  to  keep 
such  a  labor  chart.  It  shows  the  efficiency  in  a  department  which 
includes  60  per  cent  of  the  total  cost  of  mining.  There  is  only  one 
other  curve  which  might  well  be  added  at  square  set  and  stull 
timbered  mines.  This  is  a  curve  showing  the  number  of  men  on 
the  timber  gang.  Probably  there  is  no  work  about  a  mine  where 
more  loafing  is  done  than  on  the  timber  gang. 

Such  a  curve  in  square  set  mining  would  also  show  whether  the 
filling  was  being  kept  up  with  the  stoping,  for  when  it  lagged 
behind,  the  timberman  curve  would  mount  as  bulkheads  became 
necessary. 


6i8  BUSINESS  STATISTICS 

Other  Graphic  Records.  In  a  Number  376  Keuffel  and  Esser 
cross-section  book,  graphic  records  of  most  of  the  principal  items 
in  the  accounts  are  kept.  These  include  cost  per  ton,,  amount  of 
the  straight  accounts,  distributed  accounts,  actual  total  tonnage 
for  each  month,  actual  average  tonnage  for  each  day  for  each 
month,  actual  average  tons  mined  per  day  per  man  employed, 
the  same  per  man  underground,  average  number  of  laborers  of 
each  class  per  day  for  the  month,  the  average  of  the  total  men 
employed  per  day  for  the  month,  the  same  figure  for  miscel- 
laneous labor  and  also  for  underground  labor.  Other  curves  are 
plotted  for  the  average  number  of  machines  in  ore,  in  waste,  and 
the  average  number  of  all  machines  drilling.  In  order  to  check 
the  mine  assaying  and  sampling,  curves  are  plotted  for  the  assays 
and  analysis  of  the  smelter  pulp,  ore  bin  samples  (grab  samples 
from  tram  buckets),  and  the  average  of  all  face  samples.  These 
generally  check  quite  closely.  The  sum  total  of  the  net  debits 
is  plotted  and  also  curves  showing  the  cost  per  hole  drilled  by 
machines,  cost  per  shift,  cost  per  machine,  holes  drilled  per  shift, 
and  other  data  from  the  monthly  machine  drill  reports. 

From  these  curves  by  comparing  them  with  other  months  the 
officials  can  tell  at  a  glance  how  the  work  in  different  departments 
compares  with  the  work  for  other  months.  The  manager  can  see 
at  a  glance  exactly  what  part  of  the  work  needs  watching  and  in 
case  of  any  extraordinary  figures  can  tell  exactly  where  to  look 
for  the  disconcerting  data  without  wading  through  a  whole  mass 
of  figures  and  reports.  The  graphic  method  of  recording  the 
different  data  increases  the  value  of  the  cost  and  data  keeping 
work  fully  twofold  and  probably  no  money  spent  by  the  company 
brings  in,  of  course  indirectly,  greater  returns  than  that  spent  in 
plotting  the  different  data. 

Blasting  Report.  At  the  mine  special  provision  is  made  under- 
ground to  safeguard  the  men,  especially  from  blasting  accidents 
which,  after  falls  of  ground,  are  the  most  numerous  accidents  in 
metal  mines.  This  Blasting  Report  shows  the  number  of  missed 
holes  and  their  position  while  a  blue  print  report,  on  which  is 
marked  the  places  that  are  dangerous,  owing  to  approaching 
work,  is  also  used. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  619 

Posted  throughout  the  mine  at  these  places  are  white  painted 
sign  boards  on  which  in  black  letters  is  the  warning  ^'  Dangerous 
from  approaching  working/'  While  many  of  the  workmen  are 
foreigners  who  cannot  read  English,  they  soon  find  out  the  mean- 
ing of  these  white  signs.  Possibly  a  death  head  and  crossbones 
might  give  a  more  vivid  warning  to  any  one  whether  he  could 
read  the  sign  or  not. 

All  development  and  exploratory  work  at  the  Highland  Boy  is 
contracted  that  can  be.  Often  by  placing  the  price  just  high 
enough  so  that  the  machine  helpers  will  have  to  aid  in  running 
the  cars  in  order  that  the  men  can  make  good  wages,  the  cost  of 
the  work  can  be  made  considerably  less  than  by  day  pay,  for  the 
machine  helper  on  day  pay  will  only  tend  chuck  and  an  extra 
mucker  would  have  to  be  paid. 

Contract  Curves.  In  order  to  facilitate  the  setting  of  contract 
prices  and  to  aid  in  judging  whether  contract  work  will  pay  com- 
pared with  day  pay,  these  curves  have  been  worked  out.  These 
curves  are  plotted  in  No.  376  K.  and  E.  cross-section  books  in 
which  the  paper  is  ruled  to  tenths.  The  first  set  that  applies  to 
contract  work  are  applicable  to  any  camp,  but  those  that  apply 
to  the  day-pay  work  of  course  are  only  applicable  to  camps 
where  the  Bingham  scale  of  wages  are  paid. 

On  the  contract  labor  chart  the  scale  is  $1.00  to  an  inch  verti- 
cally, and  ten  feet  to  an  inch  horizontally.  The  horizontal 
distance  represents  the  number  of  feet  driven  in  a  week,  while 
the  vertical  scale  represents  the  amount  of  money  each  man  on  the 
contract  is  earning  a  day.  In  plotting  these  curves  we  have  the 
equation  that  ny  =  mx,  where  y  is  the  wage  earned  by  each  man 
a  day,  x  is  number  of  feet  driven  in  a  week,  w  is  a  constant,  the 
price  paid  per  foot,  and  n  is  the  number  of  man  shifts  worked 
during  a  week.  This  equation  is  of  the  first  degree  and  is  therefore 
represented  by  a  straight  line. 

Consequently  in  plotting  the  different  lines  on  these  diagrams 
the  greatest  distance  that  is  represented  is  assumed  to  be  the 
distance  driven.  This  distance  and  the  price  paid  per  foot  are 
multiplied  together  and  then  divided  by  seven  times  the  number 
of  men  working  on  the  contract.    This  gives  the  wage  that  each 


620  BUSINESS  STATISTICS 

man  would  earn  each  day  had  that  distance  been  driven.  Upon 
plotting  this  rate  as  an  ordinate,  or  vertical  distance,  and  an 
assumed  distance  driven  a  week  as  abscissa,  or  horizontal  dis- 
tance, and  connecting  the  point  thus  obtained  with  the  origin  by  a 
straight  line,  you  have  a  curve  which  represents  all  the  conditions 
when  that  rate  per  foot  is  paid. 

This  curve  is  useful  in  many  ways.  It  can  be  used  to  tell  at  a 
glance  what  the  men  are  earning  from  the  rate  of  progress  that 
they  are  making.  Or  in  setting  the  contract  it  can  be  used  to  fix 
the  price  per  foot  when  one  decided  how  much  the  men  should 
drive  or  raise  in  a  week  in  that  rock  and  what  wage  the  men 
should  be  allowed  to  make  a  day. 

The  Fay-Day  Curves.  The  pay-day  curves  are  plotted  with  the 
cost  of  labor  per  foot  as  verticals  or  ordinates  and  the  distance 
driven  per  week  as  horizontals  or  abscissas.  The  formula  for 
these  curves  is  XF  =  ikf ,  where  M  is  the  constant,  representing 
the  wages  earned  in  a  week  by  the  crew  in  question,  Y  is  the  cost 
of  labor  per  foot  and  X  is  the  distance  in  feet  driven  per  week. 
This  equation  is  that  of  a  parabola. 

The  curve  is  most  easily  plotted  by  means  of  the  slide  rule  and 
dividing  the  constant  sum  by  either  the  assumed  distance  driven 
per  week,  or  the  assumed  cost  of  labor  per  foot.  The  first  is  the 
better  way  as  the  quotient  is  the  price  per  foot,  and  as  a  tenth- 
scale  paper  is  used  the  decimals  can  easily  be  plotted. 

The  pay-day  curves  are  useful  in  telling  at  a  glance  the  approxi- 
mate cost  of  the  labor  per  foot  at  the  rate  the  drift  is  being  driven 
a  week  and  whether  it  is  better  to  contract  the  drift.  You  can 
also  tell  how  far  a  contractor  would  have  to  drive  at  any  price  per 
foot  to  make  a  day's  pay.  All  these  curves  apply  to  any  kind  of 
lineal  advance,  whether  it  is  raising,  drifting  or  shaft  sinking.  The 
curves  are  great  aids  and  have  been  found  very  useful. 

Blasting  Report.  At  the  Highland  Boy  mine  there  are  two 
bosses  on  shift.  These  make  out  their  reports  together.  One 
of  these  reports  is  called  the  Blasting  Report.  [The  headings 
are:  —  Level,  Working  Place,  Machine  Drills  (Number  Blast- 
ing; Time  of  Blasting),  Hand  Work  (Men  Blasting;  Time  of 
Blasting),   No.   Missed  Holes   Reported,    Ready  for  Timber, 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  62 1 

Ready  for  Track,  Is  the  Pipeman  Needed  ?  Remarks.]  This 
report  is  made  out  mainly  to  give  information  to  the  other  shift 
as  to  the  missed  holes  and  what  is  required  at  each  working  place. 

Shift  Foreman  Report.  The  shift  bosses  together  also  make 
out  the  Shift  Foreman's  report.  This  report  is  merely  a  labor 
report  and  is  used  to  check  the  timekeeper  who  goes  through  the 
mine  during  the  first  part  of  each  shift  in  order  to  check  up  the 
places  where  the  men  are  working,  so  that  he  can  distribute 
the  labor  expense  properly  to  the  different  items  in  the  monthly 
report.  The  labor  sheet  is  also  used  in  making  up  the  labor  and 
tonnage  chart  which  is  described  in  the  fore  part  of  this  article. 
These  are  the  two  principal  reports,  but  special  requirements 
have  necessitated  others. 

Powder  Report.  The  company  decided  to  keep  track  of  the 
powder  and  fuse  issued  to  each  man.  So  powder  magazines  were 
constructed  in  different  parts  of  the  mine.  These  are  supplied 
with  dynamite  and  capped  fuse  by  the  powder  monkey,  and 
they  are  kept  locked.  The  key  is  given  to  some  one  working 
in  that  part  of  the  mine,  generally  a  timberman  and  less  often 
a  miner.  This  man  comes  to  the  magazine  an  hour  before  blast- 
ing time  and  unlocks  the  magazine  he  is  appointed  to  care  for. 
Then  he  gives  out  dynamite  and  fuse  and  records  the  number 
of  the  man,  the  place  that  the  man  is  working,  the  sticks  of 
dynamite  and  the  grade,  the  number  of  holes  drilled,  the  number 
of  the  machine  and  other  data  on  the  form  that  is  called  for.  This 
powder  report  is  used  in  several  different  ways.  It  is  used  for 
supplying  data  entered  in  the  Daily  Powder  Report,  also  for 
entering  in  the  record  of  the  individual  machine  drills,  and 
for  distributing  the  amount  of  powder  used  in  development 
work,  in  exploring  and  in  breaking  surface  waste;  the  balance 
is  charged  to  stoping. 

In  the  above  all  drifting,  cross-cutting  and  raising  in  ore,  or  for 
the  purpose  of  developing  a  known  ore  body,  is  charged  to  the 
development  work,  while  any  such  work  done  in  searching  for 
unknown  ore  bodies  is  charged  to  exploration. 

Tool  Sharpening  Report.  This  report  was  started  owing  to 
the  large  number  of  drills  and  tools  that  were  disappearing. 


622  BUSINESS  STATISTICS 

This  report  is  made  out  by  the  blacksmith  foreman.  The  black- 
smith counts  the  sharp  steel  that  is  sent  to  each  opening  each 
day  and  reports  the  tools  and  drills  that  are  returned  from  each 
opening. 

These  figures  are  entered  in  a  No.  376  K.  and  E.  cross-section 
book  having  columns  with  similar  headings  to  the  blacksmith's 
report  printed  by  hand  in  them  except  that  in  place  of  the  mine 
working  column  there  is  a  date  column.  These  pages  are  ruled  to 
a  tenth  scale  and  are  about  6  1/2"  X  8  1/2"  in  size.  The  cross- 
sectioning  aids  greatly  in  keeping  the  figures  in  the  columns 
vertical.  In  one  part  of  the  book  a  summary  of  all  the  workings 
is  kept,  while  in  another  part  there  is  an  individual  record  of  each 
working  place  where  tools  are  received  or  sent  out,  the  same 
headings  being  used  as  in  the  summary.  These  reports  are 
balanced  every  change  day  and  at  the  end  of  each  month  and  the 
on-hand  of  all  dull  and  sharp  steel  in  the  shop  at  the  first  of  the 
month  is  taken.  In  this  way  an  approximation  is  reached  regard- 
ing the  number  of  tools  and  drills  lost,  and  also  an  idea  of  where 
the  loss  is  occurring.  From  this  report  the  superintendent 
readily  learns  whether  the  different  machines  are  being  supplied 
with  sufficient  sharp  steel  as  well  as  other  information. 

The  men  on  the  electric  locomotive  report  the  number  of  cars 
delivered  to  the  tramway  bins  in  the  book.  The  tramway  men 
keep  count  of  the  number  of  tram  buckets  sent  out  in  another  and 
sample  each  bucket  as  it  is  loaded,  while  the  number  of  railroad 
cars  and  weight  of  ore  shipped  to  the  smelter  are  also  reported  in 
another  book.  From*  the  different  books  the  figures  for  these 
items  are  obtained  for  the  different  reports. 

The  foreman  of  the  sawmill  makes  a  report  in  regard  to  the 
time  spent  in  framing  timbers  for  the  different  openings.  The 
machine  shop  foreman  records  in  a  journal  the  number  of  each 
machine  received  for  repairs  and  the  time  that  he  received  it.  He 
keeps  account  of  the  cost  of  repairing  the  drill  and  finally  reports 
when  it  was  sent  back  to  the  mine.  The  machine  drills,  to  facili- 
tate this  recording,  are  marked  with  a  brass  tag  screwed  to  them 
having  a  running  number.  By  the  number,  the  make  and  size  of 
the  drill  is  known  as  certain  ranges  of  numbers  are  kept  for  each 
size  and  make  of  machine  used  in  the  mine. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  623 

Machine  Drill  Reports.  From  this  report  of  the  machine 
shop  foreman  the  monthly  machine  drill  record  is  made  out, 
using  the  powder  reports  to  determine  in  what  places  the  drill 
was  working  and  who  was  nmning  the  drill.  From  the  powder 
report  the  number  of  holes  drilled  is  also  obtained  while  the 
machine  shop  record  shows  when  the  drill  was  sent  out  and 
when  taken  in.  Of  course  the  cost  is  distributed  according  to  the 
class  of  work  that  the  drill  was  working  on,  and  the  proper  part  of 
the  cost  of  the  repairs  is  apportioned  to  each  account  from  the 
percentage  of  the  time  that  the  drill  was  used  on  that  kind  of 
work.  This  Monthly  Machine  Report  is  kept  on  a  form  as  shown. 
[The  headings  are:  —  Machine  Drill  (No.;  Name),  Where 
Machine  Drill  Has  Been  Used  (Level;  Working  Place;  Acct.), 
Drill  Runners  (No.;  Name),  Work  of  Drill  Runners  (Shifts 
Used;  Holes  Drilled),  Total  Shifts  Used,  Total  Holes  Drilled, 
Holes  per  Shift,  Date  Sent  from  Machine  Shop,  Date  Returned 
to  Machine  Shop,  No.  of  Days  in  Mine,  Date  Repaired,  Sup- 
plies Used  (Material;  Cost),  Hours  Labor  (Hours;  cost).  Date 
Returned  to  Mine,  Distrib.  Cost  of  Repairs,  Total  Cost  of  Re- 
pairs, Cost  per  Shift,  Cost  per  Day,  Cost  per  Hole  Drilled.] 
By  indexing  the  numbers  of  the  men  working  on  the  differ- 
ent machines  a  record  is  kept  of  the  work  done  by  each  drill 
runner. 

Sampling  Records.  At  the  Highland  Boy  mine  the  ore  varies  in 
value  greatly  within  short  distances,  and  from  its  appearance 
nothing  can  be  told  about  what  the  ore  will  assay.  On  that 
account  the  ore  has  to  be  sampled  closely;  in  fact  every  set  of  ore 
mined  is  sampled.  To  do  this  a  sampler  is  employed  on  each 
shift.  These  samples  are  given  a  running  number  and  a  tag  is 
nailed  to  the  cap  nearest  the  sample.  This  tag  is  punched  out  of 
linen  mapping  cloth  and  is  marked  with  water-proof  ink.  This 
has  been  found  to  be  the  best  way  to  mark  the  position  of  the 
samples,  although  several  other  methods  were  used.  Besides  the 
running  number  placed  on  the  sample  bag  a  paper  tag  contain- 
ing the  position  of  the  set  sampled  with  respect  to  the  zero  set, 
which  is  carried  up  from  floor  to  floor,  through  the  stope,  is  also 
put  in. 


624  BUSINESS  STATISTICS 

The  samplers  record  on  a  floor  map  the  position  of  the  different 
samples.    On  the  assay  map  the  final  record  is  made. 

The  assay  results  are  also  written  in  the  shift  bosses'  and  the 
foreman's  pocket  notebooks,  together  with  the  running  number  of 
the  sample.  They  use  the  tag  to  find  the  position  of  the  sample. 
The  assay  results  are  also  recorded  on  large  floor  maps,  and  the 
date  of  the  sampling  is  also  written  in  each  set.  These  floor  maps 
are  kept  on  loose  leaf  pages  36  in.  X  23  in.  The  title  consists  of 
"  Utah  Consolidated  Mine  Assay  Map  "  with  headings  to  desig- 
nate the  Level,  Floor,  Room,  and  the  Ore  body.  On  the  inside 
end  is  a  4-in.  margin  carrying  the  perforations  for  binding,  while 
at  the  outer  edge  is  a  2-in.  margin.  This  leaves  a  space  29  3/4 
X  19  3/4  available  for  the  floor  map.  This  is  divided  into 
squares  21/2  in.  on  the  side  and  each  of  these  squares  is  sub- 
divided into  25  squares  so  that  each  set  is  represented  by  an 
area  1/2  in.  square.  The  assays  from  the  drifts,  cross-cuts,  and 
raises,  which  are  sampled  after  each  round  is  blasted,  are  recorded 
on  assay  cards. 

Only  the  average  of  the  assays  for  the  week  are  recorded  on 
these  cards,  but  the  individual  assays  can  be  obtained  from  the 
assayer's  book. 

On  the  assay  plan  map  only  the  percentage  of  copper  is  re- 
corded as  the  gold  and  silver  contents  bear  a  fairly  constant  rela- 
tion to  the  copper  in  the  ore.  After  passing  through  a  lean  place 
in  the  stope,  often  rich  ore  is  again  struck.  In  fact  many  new 
ore  bodies  have  been  found  by  drifting  into  old  stopes  and  explor- 
ing areas  marked  mineralized  upon  the  old  geological  maps  and 
the  assay  plans.  This  map  shows  the  value  of  the  geological 
mapping  and  of  the  keeping  of  assay  plan  maps  of  each  floor.  In 
case  that  ca;ving  were  attempted  all  the  advantages  of  this  work 
would  be  lost,  since  at  this  mine,  owing  to  the  fact  that  all  the 
limestone  carries  some  silica,  the  siUca  contents  of  the  ore  would 
be  so  increased  that  much,  if  not  all,  the  gain  in  cheapened  stoping 
costs  would  be  eaten  up  by  the  higher  smelting  charge. 

As  has  been  intimated,  geological  maps  are  also  kept  show- 
ing the  geological  conditions  in  the  stopes,  drifts,  and  raises,  the 
dip  and  strike  of  the  faults,  the  position  of  the  different  contacts 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  625 

between  quartzite  and  limestone  and  of  the  different  mon- 
zonite  dikes  are  indicated,  especially  such  areas  as  show  signs  of 
mineralization. 

The  Drilling  Report.  Often  it  is  desirable  to  know  what  is 
the  assay  of  the  ore  being  mined  so  as  to  regulate  the  grade  of  ore 
shipped  in  order  to  take  the  best  advantage  of  the  smelting 
contract.  To  do  this  the  form  of  report  called  Drilling  Report 
is  used.  [The  general  headings  are:  —  Level,  Working  Place, 
Big  Machines,  Small  Machines,  Single  Jackers.  For  each  class 
of  machines  there  are  the  following  sub-headings:  —  Place 
Drilling,  Est.  Tons,  %  Cu.,  Tons  Cu.] 

The  place  where  the  drill  is  working  is  determined  from  the 
sampler's  report,  while  the  assay  of  the  ore  in  which  the  drill  is 
working  is  determined  from  the  assayer's  book,  or  else  from  the 
assay  plan  map.  The  amount  of  ore  broken  is  determined  by 
estimation.  For  large  machines  in  stopes  forty  tons  per  day  are 
used,  for  small  machines  thirty  tons  per  day,  and  for  hand  drilling 
the  amount  of  ore  trammed  from  each  opening.  By  these  approxi- 
mations the  grade  of  ore  being  mined  is  determined  and  adjusted. 
Experience  has  shown  that  this  method  is  accurate  and  gives  a 
mixture  assaying  within  a  few  tenths  of  a  per  cent  of  the  grade 
calculated.  These  are  all  the  primary  reports,  from  them  other 
reports  are  made  up. 

Daily  Labor  Report.  The  Daily  Labor  Report  is  made  out  by 
the  timekeeper.  This  report  is  used  in  plotting  the  Labor  Chart 
already  mentioned. 

The  first  column  is  for  the  date,  then  comes  labor  grouped  under 
the  general  headings.  Day  Shift,  Afternoon  Shift,  Night  Shift  and 
Total  Labor.  The  sub-headings  under  the  first  three  are:  Shift 
Boss,  Mine  Foreman,  Timberman,  $2.75  Miners,  Muckers,  $2.00 
Miners,  Machiners,  Machine  Helpers,  Timbermen  Helpers,  Total 
Number  of  Men,  Tons  of  Ore  Mined,  Tons  of  Ore  Mined  per 
Man  per  Shift.  [These  daily  reports  are  posted  to  a  monthly 
report.] 

Daily  Machine  Report.  From  the  different  mine  reports  a 
number  of  daily  reports  are  made  out.  The  Daily  Machine 
Report  is  kept  on  blue  print  paper  printed  from  cross-section 


626  BUSINESS  STATISTICS 

tracing  cloth  so  as  to  give  guide  lines  for  the  different  figures, 
as  this  facilitates  the  averaging  which  is  done  once  a  week  and 
at  the  end  of  each  month.  The  writing  on  the  blue  print  is  done 
with  caustic  soda  which  gives  a  white  line. 

Daily  General  Mine  Report  and  Daily  Labor  and  Machine  Report. 
The  other  daily  reports  are  kept  in  No.  376  K.  and  E.  cross- 
section  books.  Each  of  the  two  general  mine  reports  takes  two  of 
the  opposite  pages,  while  in  the  back  of  the  book  is  a  summary  of 
the  different  items  for  each  month  of  the  year.  The  headings 
of  these  two  tables  are  given  in  the  following  paragraph.  These 
daily  reports  are  totaled  and  averaged  each  week  and  at  the  end 
of  each  month. 

In  the  General  Mine  Report,  the  number  of  cars  shipped  is 
obtained  from  the  car  book.  The  tons  shipped  are  calculated 
from  them  by  using  the  average  weight  of  a  car  load  of  ore  as 
determined  during  several  months.  The  total  number  of  men 
underground  and  also  the  total  employed  are  obtained  from 
the  Labor  Sheet.  In  calculating  the  tonnage  per  man  the  esti- 
mated tramway  tonnages  are  used  as  these  are  the  most  accurate 
figures  obtainable  at  the  mine  since  the  average  weight  of  a 
bucket  of  ore  as  determined  during  several  months  is  used.  The 
underground  labor  is  estimated  from  the  Labor  Sheet.  The  ore 
sent  over  the  tramway  is  estimated  in  the  manner  already  indi- 
cated, while  the  analysis  of  the  ore  is  that  of  the  grab  sample 
taken  from  the  different  buckets  at  the  tramway  loading  station. 
The  last  column  [Estimated  Tonnage  for  Month  on  Basis  of 
Tons  Shipped  to  Date]  is  calculated  from  the  total  tons  shipped 
since  the  first  of  the  month;  this  column  is  important  as  indicat- 
ing whether  or  not  sufficient  ore  is  being  mined. 

In  the  second  report,  called  Daily  Labor  and  Machine  Report, 
the  miscellaneous  labor  items  are  obtained  from  the  labor  sheet, 
the  data  on  the  machine  drills  is  obtained  from  the  sampler's 
reports,  the  weekly  advance  from  the  weekly  reports  of  explora- 
tion and  development,  the  mine  assays  from  the  preceding  daily 
report,  and  the  smelting  assays  from  the  smelting  reports. 

Monthly  Summaries.  In  the  back  of  the  daily  report  book,  the 
summary  for  each  year  takes  up  two  pages.   The  months  are  the 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  627 

headings  for  the  vertical  columns,  while  the  side  headings  are  as 
follows:  Number  of  Railroad  Cars  Shipped,  Number  of  Buckets 
sent  over  the  Tramway,  Estimated  Tonnage  from  Railroad  Cars, 
The  Same  from  Tramway  Buckets,  Actual  Number  of  Tons 
Shipped,  Per  cent  Copper  in  Ore  from  Bins,  Same  from  Mine 
Samples,  Same  from  Smelter  Pulp,  Per  cent  Iron  from  Ore  in  Ore 
Bins,  Same  from  Smelter  Pulp,  Per  cent  Silica  from  Ore  in  Bins, 
Same  from  Smelter  Pulp,  Ounces  Gold  in  Ore  from  Bins,  Same 
from  Mine  Samples,  Same  from  Smelter  Pulp,  Ounces  Silver  in 
Ore  from  Ore  Bins,  Same  from  Mine  Samples,  Same  from  Smelter 
Pulp,  Per  cent  Lime  in  Smelter  Pulp,  Per  cent  Magnesium  in 
Smelter  Pulp,  Per  cent  Lead  in  Smelter  Pulp,  Per  cent  Moisture 
in  Smelter  Pulp,  Total  Miscellaneous  Labor,  Average  of  Same  per 
Day,  Total  Underground  Labor,  Average  of  Same  per  Day,  Total 
Men  Employed,  Average  of  Same  per  Day,  Tons  per  Man  Under- 
ground (buckets).  Tons  per  Man  Underground,  Actual,  Tons  per 
Man  Employed  (buckets).  Tons  per  Man  Employed,  Actual, 
Average  Number  of  Machines  on  Waste  per  Day,  Average  Num- 
ber of  Machines  on  Ore  per  Day,  Average  Total  Number  of 
Machines  Running  per  Day,  Advance  in  Drifts,  Raises,  etc., 
Average  Tons  per  Day  from  Buckets,  Same  from  Railroad  Cars, 
Same  from  Actual  Weight. 

VII.  Railway  Accounts  and  Statistics  ^ 

By  a.  J.  County 

Railroad  management,  whether  in  the  transportation,  traffic, 
engineering,  finance  or  accounting  departments,  is  a  profession, 
and  the  larger  and  well-estabUshed  railways  begin  each  year,  not 
only  with  a  record  of  what  has  been  accomplished  in  the  past  year, 
but  with  an  estimate  for  the  current  year  made  after  consultation 
with  the  officers  in  charge  of  the  various  departments,  covering, 
first,  the  revenues;  second,  a  program  of  maintenance  and 
replacement  expenditures  to  be  paid  out  of  current  revenues, 
including  therein  proper  depreciation  charges  unless  sufficient 

^  Bulletin  of  the  International  Railway  Congress  Association  (English  Edition), 
June,  19 10,  pp.  3014-3024.    Reprinted  by  permission  of  the  author. 


628  BUSINESS  STATISTICS 

replacements  are  currently  made  to  make  good  the  annual  de- 
preciation; third,  an  approximate  estimate  of  other  operating 
expenses;  fourth,  an  estimate  of  what  should  be  spent  out  of 
current  revenues  for  betterments  of  and  additions  to  the  railway 
and  its  equipment,  and  fifth,  a  list  of  expenditures  for  new  rail- 
way construction  equipment  and  real  estate,  chargeable  to  capital 
account.  Between  such  capital  expenditures,  and  the  mainte- 
nance and  replacement  items  charged  in  operating  expenses,  are 
the  expenditures  above  mentioned  in  "  fourth  "  for  betterments 
and  improvements,  which  run  concurrently  in  making  renewals 
and  which  it  has  been  the  practice  of  conservatively-managed 
American  roads  to  provide  out  of  the  surplus  income  remaining 
after  the  payment  of  the  operating  expenses,  taxes,  interest  on 
funded  debt,  rentals,  and  other  obligatory  charges. 

Such  betterments  and  improvements,  provided  out  of  surplus 
income,  may  include  such  items  as  the  elimination  of  grade  or 
level  crossings,  improvements  in  the  grades  and  alignment  of  the 
railway  and  in  the  yards  and  terminal  facilities  and  equipment, 
improvements  in  the  design  and  character  of  stations,  bridges  and 
other  structures,  when  they  are  betterments  which  add  nothing  to 
the  original  plant  other  than  the  improvement  which  progress 
substitutes  for  the  existing  plant,  or  are  necessary  to  keep  the  rail- 
way and  equipment  up  to  the  standard  fixed  by  the  requirements 
of  its  business.  These  should  be  capitalizable  because  they  do  not 
substantially  increase  the  revenues,  materially  reduce  expenses, 
or  add  an  important  element  of  value  to  the  property  as  a  whole. 
This  policy  has  been  pursued  for  so  many  years  that  very  few  of 
the  standard  American  railways  could  now  be  reproduced  for  the 
par  value  of  their  outstanding  stocks  and  bonds,  and  it  has  been 
the  chief  means  whereby  the  bonus  stock  issued  used  for  promotion 
rewards  in  their  early  history  (known  as  watered  stock)  have  been 
corrected  and  the  integrity  of  the  capital  account  restored  and 
preserved.  It  would  be  a  matter  of  deep  regret  if  this  conserva- 
tive policy  should  be  disrupted  and  such  expenditures  be  forced 
into  and  retained  in  capital  account  by  Governmental  order. 
^As  the  year  proceeds,  the  estimates  above  referred  to  are  care- 
fully supervised,  and  additions  made  to  the  construction  list  as 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  629 

the  exigencies  of  present  and  future  traffic  demand  of  expendi- 
tures for  branch  and  relief  lines,  extensions  of  terminals,  yards, 
tracks,  equipment,  etc.,  upon  the  recommendation  of  the  respon- 
sible officer  in  charge  of  that  branch  of  the  service,  and  appro- 
priations are  voted  therefor  by  the  Board  of  Directors,  or  other 
proper  committee  or  executive  officer. 

With  the  question  of  expenditures  for  new  railway  lines,  facih- 
ties,  and  rolling  stock  definitely  and  prudently  decided,  taking 
into  consideration  not  only  present  but  future  requirements,  for  a 
railroad  is  a  permanent  institution,  to  produce  and  sell  a  product 
called  "  transportation,"  the  duty  of  efficient  management  is  first 
devoted  to  the  quantity  of  traffic,  its  movement  and  the  revenues 
therefrom,  and  the  cost  of  its  conduct  —  its  operating  expenses. 

It  is  the  duty  of  the  compiler  of  statistics  to  separate  the  dif- 
ferent classes  of  traffic  carried  and  ascertain,  as  far  as  it  is  possible 
to  do  so,  whether  the  service  is  rendered  at  a  profit  or  a  loss.  The 
railroads  are,  of  course,  obliged  to  continue  various  train  service, 
especially  for  passenger  traffic,  and  also  to  carry  many  items  of 
freight  traffic,  which  on  the  face  of  the  returns  cannot  earn 
enough  to  pay  either  their  share  of  the  maintenance  and  operating 
expenses  and  other  obligatory  charges,  or  their  part  of  the  divi- 
dend, and  must  look  to  the  more  profitable  items  for  recompense, 
so  that  rates  are  necessarily  made  on  the  value  of  the  service 
rendered  and  the  risk  assumed,  and  not  on  the  cost  of  trans- 
porting each  commodity  and  the  classes  of  passenger  traffic.  The 
railways  have  separated  cost  to  the  extent  of  over  two-thirds  of 
their  total  expenditures  between  the  passenger  and  freight  traffic, 
respectively,  but  one-third  of  the  cost,  made  up  of  items  like 
maintenance  of  way,  is  common  to  both  passenger  and  freight 
traffic,  and  also  the  taxes,  interest  on  the  investment,  etc.  These 
common  costs  have  been  divided  largely  on  the  basis  of  train 
mileage,  as  being  the  most  convenient  and,  weighing  all  past  and 
present  practical  conditions,  is  perhaps  the  most  acceptable 
method,  although  locomotive  and  car  mileage  are  used  by  some 
roads. 

The  end  of  this  cost  accounting  will  not  be  reached  until  the 
return  and  cost  of  every  service  rendered  for  both  passenger  and 


630  BUSINESS  STATISTICS 

freight  traffic  is  resolved  into  units  of  lading  and  distance,  reflect- 
ing the  use  that  has  been  made  of  the  equipment,  and  the  service 
rendered  on  each  of  the  larger  divisions  or  sections  of  the  railway, 
and  comparisons  made  with  previous  years.  The  railways  no 
longer  consist  of  short  lines  of  single  track,  which  in  the  earlier 
days  could  be  supervised  by  a  single  officer  and  a  small  staff,  but 
of  large  systems  with  great  stretches  of  four- track  lines.  These 
require  for  their  operation  an  extensive  and  trained  organization, 
and  the  advancement  of  the  art  has  been  so  great,  due  to  the 
provision  of  adequate  facihties  and  equipment,  traffic  density, 
rate  changes,  and  increased  taxes,  wages  and  prices  of  all  kinds, 
that  each  branch  of  the  railroad  business  is  becoming  specialized 
and  the  question  of  costs  and  net  results  is  reaching  the  stage  of  a 
highly  organized  industry. 

The  day  of  general  facts  and  individual  preference  in  recording 
results  is  past,  and  statistics  that  fully  tell  the  story  and  will  bear 
the  Hght  of  comparison  must  be  kept  to  justify  the  efficiency  of  the 
operating  officer,  whose  value  is  demonstrated  by  the  facility  and 
economy  with  which  the  traffic  is  moved,  under  the  particular  or 
pecuHar  conditions  applying  in  the  part  of  the  railway  under  his 
supervision,  and  the  operating  plant,  consisting  of  the  road, 
stations,  shops  and  equipment,  is  maintained  and  operated. 

Those  lines  with  which  I  am  most  famihar  operate  the  railway 
by  separating  it  into  divisions,  each  in  charge  of  a  Division 
Superintendent,  having  full  authority,  and  responsible  to  a 
General  Superintendent,  who  supervises  several  divisions,  and 
who  in  turn  is  responsible  to  the  General  Manager  and  the  latter 
to  the  executive  officers.  There  are,  of  course,  many  companies 
which  pursue  a  different  plan  of  organization,  and  effect  results  by 
different  methods  and  different  officers  from  what  I  describe. 

The  three  branches  of  the  service  —  Maintenance  of  Way, 
Maintenance  of  Equipment  (rolling  stock),  and  Transportation 
(train  movement)  —  are  confided  for  results  to  a  Division  Super- 
intendent having  anywhere  from  150  to  250  miles  of  main  railway 
mileage,  with  branches,  or  a  total  track  mileage,  exclusive  of 
sidings,  of  from  500  to  750  miles,  depending  on  the  traffic  density 
and  the  district  served.    Having  the  largest  share  of  the  operating 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  63  I 

expenses,  the  operating  branch  of  the  service  is  at  all  times  subject 
to  the  greatest  cross  fire. 

This  quickened  responsibility  led  to  a  demand  that  operating 
statistics  and  costs,  which  formerly  were  compiled  in  copperplate 
fashion  after  the  close  of  the  month,  should  be  promptly  furnished 
so  that  defects  could  be  remedied,  for  the  results  of  train,  car  and 
tonnage  movement  and  costs  must  reach  the  man  in  charge 
promptly  after  the  train  movement  occurs,  otherwise  a  railroad 
in  operation  may  soon  deplete  its  revenues  by  the  heavy  expend- 
itures for  labor  and  materials,  for  unremunerative  train  and  car 
mileage,  and  unless  the  cause  is  very  marked,  and  the  inquiry 
promptly  follows  the  cause,  the  management  can  obtain  only  a 
general  explanation  for  bad  operating  results  instead  of  the  con- 
servation of  its  funds.  Taking  the  experience  in  1907  as  an  illus- 
tration, when  conditions  changed  from  high  water  mark  of  traffic 
in  the  beginning  of  the  year  to  a  business  depression  in  the  latter 
part  of  the  year,  the  operating  officer  could  not  immediately 
decide  exactly  where  and  what  expenses  should  be  immediately 
reduced  without  facts  promptly  furnished  to  supplement  his 
judgment.  It  therefore  became  a  matter  for  decision  as  to  what 
statistics  were  required  to  give  a  division  officer  adequate  and 
prompt  control  of  the  situation  and  to  have  his  expenses  well  in 
control. 

The  maintenance  of  way  and  structures  and  maintenance  of 
equipment  expenses,  amounting  to  42  per  cent  of  the  total 
expenses,  are  governed,  first,  by  the  definite  program  allow- 
ances made  at  the  beginning  of  the  year,  and  these  or  the  other 
program  allowances  mentioned  are  not  exceeded  except  for 
special  purposes  approved  by  the  chief  executive  officer  in 
charge  of  operations,  and,  if  of  sufficient  importance  and  not  the 
ordinary  and  necessary  expenses  for  upkeep,  require  approval 
by  the  President  and  the  Board.  These  program  estimates  are 
based  on  and  compared  with  similar  expenses  and  costs  of  pre- 
vious years  on  various  bases,  so  that  any  unusual  features 
of  increase  or  decrease  must  be  fully  explained  before  being 
authorized.  The  changes  in  division  superintendents  or  other 
officers  on  a  large  and  active  railroad  give  a  fresh  view  of  this 


632  BUSINESS  STATISTICS 

question  at  least  every  few  years.  The  division  or  other  officer 
must  make  his  program  estimates  based  on  personal  knowledge 
and  on  the  information  given  him  by  his  staff,  composed  of  men 
trained  in  each  branch  of  the  service,  and  they  are  subsequently 
subjected  to  the  scrutiny  of  the  General  Superintendent,  and,  in 
the  case  of  maintenance  of  equipment  expenses,  to  that  of  the 
respective  superintendents  of  motive  power,  the  general  super- 
intendent of  motive  power,  or  other  proper  officer  in  charge  of 
motive  power,  and  in  the  case  of  maintenance  of  way  and 
structures  expenses,  to  the  Chief  Engineer  of  Maintenance  of 
Way,  and  finally  all  such  reports  are  scrutinized  by  the  General 
Manager.  It  is  clear  that  after  so  many  trained  men  have  given 
their  experience,  it  is  difficult  to  go  far  astray  in  a  proper  annual 
expenditure,  especially  as  after  its  authorization  its  outgo  is 
carefully  guarded,  and  is  subject  to  the  orders  of  the  division 
officer  or  his  responsible  assistants  in  charge  of  railway  and  struc- 
tures and  in  charge  of  the  equipment  handled  in  the  shops. 
There  is  also  included  as  part  of  the  maintenance  and  operating 
expenditures  a  charge  to  provide  for  the  replacement  of  the 
equipment. 

So  far  as  expenses  for  maintenance  of  tracks,  bridges,  stations 
and  structures,  and  maintenance  of  equipment  are  concerned, 
which  amount  to  about  42  per  cent  of  the  total  operating  expenses, 
they  necessarily  are  related  to  the  extent  of  the  train  service,  yet 
if  business  decreases  and  does  not  justify  it,  a  very  large  part  can 
be  deferred,  provided  the  railway  and  equipment  has  been  hereto- 
fore maintained  in  good  working  condition  and  repair. 

Little  credit  has  therefore  in  the  past  been  given  for  reducing 
maintenance  of  way  or  equipment  expenses  because  it  has  been 
the  favorite  method  of  "  skimping  the  property,"  whereas  re- 
duction in  transportation  (train  movement)  expenses  is  regarded 
as  an  indication  of  efficient  management;  but  now  that  all  ex- 
penses are  shown  in  detail  in  the  railway  reports  and  comparison 
with  the  previous  year,  one  is  enabled  to  locate  the  items  in 
which  the  saving  has  been  effected  and  prove  to  a  certainty  that 
such  has  been  the  case,  so  that  the  old  time  charge  of  "  skimp- 
ing the  property  "  by  neglecting  or  deferring  maintenance  or 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  633 

other  expenses  can  no  longer  be  made  unless  proven  by  actual 
results. 

In  transportation  expenses,  which  amount  to  51  per  cent  of 
the  total  operating  expenses  and  are  so  largely  dependent  upon 
the  train  movement,  costs  of  labor  and  suppHes,  and  traffic 
density,  it  is  more  difficult  to  effect  economies  without  the  closest 
supervision.  In  this  branch  of  the  service,  it  is  very  clear  that 
results  must  promptly  be  in  the  hands  of  the  Superintendent,  or 
labor  costs,  improper  train  loading,  slow  movement,  and  excessive 
mileage  will  seriously  interfere  with  the  results.  All  of  this  means 
close  watching  and  the  necessity  of  quickly  obtaining  unit  figures 
as  a  warning  and  comparison. 

Since  two-thirds  of  the  revenue  of  the  American  railways 
arises  from  freight  traffic,  it  is  not  surprising  to  find  that  so  much 
attention  is  directed  to  operations  in  that  service.  The  proper 
officers,  with  their  staff  officers  and  others  concerned,  have  con- 
stantly before  them  telegraphic  reports  of  yard  and  road  con- 
ditions; also  reports  for  slow  freight  trains,  showing  the  number 
of  trains,  number  of  cars,  gross  lading  of  each  car,  train  mile- 
age, running  times  between  terminals,  average  speed,  gross  ton 
mileage,  i.  e.,  weight  of  car  plus  lading,  and  also  the  potential  ton 
mileage,  which  in  effect  is  the  maximum  which  the  engine  could 
have  hauled  under  ideal  conditions.  This  is  given  for  comparison 
with  actual  gross  ton  mileage  as  regards  efficiency.  As  there  are 
many  fast  freight  trains  containing  lading  of  a  perishable  nature 
which  must  be  run  at  a  fast  speed,  independent  of  lading  and  other 
conditions,  he  also  has  a  statement  of  the  gross  ton  miles  of  all 
freight  trains  and  the  car  mileage,  loaded  and  empty,  and  the 
total,  and  percentage  of  loaded  and  empty  cars. 

The  greatest  attention  is  paid  to  the  lading  of  the  trains  so 
that  economical  movement  may  be  made  and  payment  of  over- 
time and  other  expenses  avoided.  The  daily  report  of  the  move- 
ment of  loaded  and  empty  cars  past  junction  or  other  strategic 
points,  where  trains  mass  in  reaching  a  terminal,  showing  com- 
parisons with  similar  previous  periods,  gives  one  of  the  first  clues 
to  the  business  of  the  day  and  is  about  the  quickest  statistic 
telegraphed;  then  comes  the  weekly  return  of  revenues,  divided 


634  BUSINESS  STATISTICS 

between  freight,  passenger,  mail  and  express  traffic,  the  freight 
often  being  divided  between  general  merchandise  and  mineral 
traffic,  and  for  many  roads  this  weekly  information,  although 
approximate,  is  published  in  the  newspapers.  Passenger-train 
lading  and  results  are  closely  watched,  and  the  Superintendent 
keep5  in  close  touch  with  their  movement  and  car  mileage. 
Further,  for  passenger  trains,  it  is  the  custom  with  many  roads 
/to  take  the  earnings  of  each  train  as  often  during  the  month  as 
necessary  to  insure  reliable  results  and  use  them  in  reaching  con- 
clusions as  to  whether  trains  should  be  removed  or  the  service 
supplemented.  A  statement  is  furnished  monthly  of  tonnage  of 
principal  commodities  moved  on  the  divisions.  The  monthly 
income  account  of  revenues  and  expenses  for  each  company  and 
each  division,  and  summarized  for  the  company  as  a  whole,  and 
with  the  necessary  addition  of  other  income  and  the  deduction 
of  fixed  charges  and  other  obligatory  payments,  gives  the  first 
idea  of  total  net  income  compared  with  the  same  month  and  with 
a  similar  period  of  the  previous  year.  Statistics  of  cars,  tons  and 
passengers  moved  from  the  principal  stations;  statistics  of  ton- 
nage and  passenger  mileage,  including  the  average  rates,  costs 
and  profit  or  loss  per  mile  from  each  ton  and  passenger;  and  the 
earnings,  expenses  and  net  revenue  or  loss  per  train  mile.  All  of 
these  statements  are  made  up  by  divisions  and  comparisons  and 
explanations  required  of  the  various  increases  or  decreases. 

This  information  at  the  close  of  each  month  in  the  hands  of 
each  operating  official  resolves  itself  down  to  the  following  facts 
compared  with  the  same  month  in  the  previous  years:  Number 
of  locomotives  in  service  of  various  kinds  and  the  percentage  in 
good  condition,  locomotive  mileage  of  all  kinds,  average  loco- 
motive mileage  in  the  various  branches  of  service,  average  mileage 
between  shoppings  for  repairs  during  the  month  and  the  two 
months  preceding;  passenger  car  mileage,  average  number  of 
cars  per  passenger  train,  passenger  train  detentions  due  to  loco- 
motive failures  or  car  failures;  freight  car  mileage,  east,  west, 
north  and  south,  loaded  and  empty,  and  the  percentage  of  both; 
average  number  of  cars  per  freight  train;  total  gross  ton  mileage; 
average  gross  ton  per  freight  train  and  per  freight  car;    ton 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  635 

mileage;  average  speed;  percentage  of  passengers  and  freight 
trains  on  time. 

The  above  statement  does  not  require  the  compilation  of 
operating  costs,  but  closely  following  it  is  required  a  statement 
of  operating  costs,  worked  out  upon  the  following  basis:  — 

Coal  consumption;  consumption  of  waste  and  lubricating 
material;  cost  of  certain  passenger  (based  on  1,000  passenger  car 
miles)  and  freight  (based  on  1,000,000  gross  ton  miles)  expenses, 
including  coal  for  locomotives,  wages  of  enginemen,  firemen  and 
trainmen,  and  supplies  furnished  trainmen.  Cost  of  certain  yard 
expenses  (based  on  each  1,000  cars  dispatched  from  the  yard), 
including  yard  locomotives,  wages  of  enginemen,  firemen,  con- 
ductors and  brakemen,  suppHes  (except  for  enginemen  and  fire- 
men), yard  masters  and  their  clerks,  yard-switching  and  signal 
tenders.  Cost  of  locomotive  supplies  furnished  enginemen  and 
firemen  per  locomotive  in  service;  engine-house  expenses  per 
locomotive  handled;  locomotive  repairs  per  100  locomotive  miles. 
General  movement  expenses  per  100  locomotive  miles,  covering 
lubrication,  water,  fuel,  and  other  supplies  for  road  locomotives, 
repairs,  renewals  and  depreciation  of  road  locomotives,  engine- 
house  expenses  for  road  locomotives,  road  enginemen  and 
trainmen,  train  supplies  and  expenses. 

As  this  information  covers  matters  controlled  largely  by  the 
several  division  superintendents  and  their  staff  officers,  and  is 
compiled  in  the  early  part  of  the  month  following  that  in  which 
the  expense  was  incurred,  with  the  approximate  expenditures  for 
labor  and  material,  the  remedy  is  largely  first  in  their  own  hands, 
but  does  not  remain  there,  for  the  higher  operating  officers  are 
subsequently  furnished  with  the  same  information  arranged  to 
suit  their  purposes,  and  explanations  as  to  good  or  bad  results  are 
demanded.  The  management  further  exercises  its  influence  on 
expenditures  dependent  on  many  other  conditions,  such  as  the 
present  or  anticipated  financial  and  industrial  conditions.  The 
results  of  each  month's  workings  of  the  respective  divisions, 
including  all  charges  whether  entirely  under  the  Superintend- 
ent's control  or  not,  are  sent  to  the  Superintendent  and  other 
proper  officers  of  the  operating  and  traffic  departments  to  arouse 


636  BUSINESS  STATISTICS 

their  responsibility  and  encourage  their  efforts  to  obtain  more 
business,  or  greater  promptness  and  economy  in  the  movement 
of  the  business  on  the  hne,  and  to  earn  their  proper  proportion 
of  the  fixed  charges,  dividends  that  should  be  paid,  and  amounts 
that  should  be  provided  for  betterments  out  of  income.  It  is 
essential  that  the  statistics  of  cost  to  be  put  in  possession  of  a 
divisional  operating  officer  should  first  be  those  over  which  he 
has  control,  that  he  may  apply  proper  remedies  for  unsatis- 
factory performances  brought  to  light  by  equitable  comparisons, 
but  such  officers  should  not  be  allowed  to  forget  that  other 
charges,  such  as  taxes  and  interest,  exist  which  are  not  charge- 
able to  expenses  and  that  dividends  should  be  earned  and  paid. 
Statements  of  the  unit  costs  of  handling  tonnage,  passengers  and 
baggage  at  the  larger  stations  are  also  prepared  and  sent  for 
criticism  to  the  various  officers,  and  to  ascertain  why  costs  are 
higher  or  lower  at  one  station  than  another.  On  some  railways, 
the  chief  features  of  expenditures  are  also  exhibited  by  chart  and 
diagrams  so  that  vivid  pictures  as  well  as  figures  may  drive  home 
the  facts.  There  are  now  on  several  of  the  operating  staffs 
officers  who  are  charged  with  the  duty  of  supervising  operating 
costs  of  all  kinds,  including  shop  results,  and  to  ascertain  by  per- 
sonal examination  and  conference  why  better  results  cannot  be 
obtained,  and  create  a  wholesome  spirit  of  emulation  among  the 
various  officers  and  divisions  to  bring  about  these  results.  I  do 
not  wish  to  convey  the  impression  that  all  the  railways  in  the 
country  compile  and  use  all  of  the  foregoing  facts,  or  that  the 
American  railway  officer  spends  the  most  of  his  time  sitting  at  a 
desk,  wearing  a  pair  of  spectacles,  digesting  railway  statistics  or 
has  any  greater  love  for  them  than  officers  in  other  countries,  but 
in  so  far  as  they  are  of  assistance  to  him,  he  must,  and  does,  study 
railway  statistics.  Constant  and  personal  familiarity  with  his 
operating,  division,  or  departmental  work,  with  the  assistance  of 
a  trained  staff,  enables  him  to  discern  promptly  any  danger  signal 
of  loss  of  business  or  excessive  cost.  As  the  result  of  an  evolution 
in  a  chain  of  progress  of  which  he  is  a  part,  he  must  and  does 
profit  by  statistics,  and  improves  the  situation  by  direct  and 
immediate  action  taken  on  the  ground  as  the  result  of  his  con- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  637 

sideration,  or  if  he  cannot  do  so,  is  in  a  position  to  report  to  his 
superior  officer  reasons  for  such  inability  and  receives  the  results 
of  the  more  extended  experience  of  the  latter,  who  will  also 
probably  warn  other  officers. 

I  make  no  reference  to  the  large  number  of  reports  concerning 
the  daily  operating  routine  and  management  because  they  have 
become  standard,  and  relate  to  different  features  of  the  railway — 
ties,  rails,  its  equipment,  supplies,  shops,  signals,  and  interlocking, 
tests  of  all  kinds;  or  to  the  special  studies  as  new  problems  arise. 
These  are  all  taken  for  granted  as  being  necessary  in  every 
country. 

The  statistics  and  other  information  furnished  by  the  officers, 
agents  and  employees  of  each  division  must  be  such  so  that  when 
supplemented  by  the  fixed  charges  and  other  obligatory  pay- 
ments and  dividends  disbursed,  the  comptroller,  auditor,  or 
general  accounting  officer  may  compile  therefrom  the  respective 
monthly  and  annual  reports  to  the  stockholders  and  to  the 
National  and  State  authorities,  and  must  comprehend  the 
statistics  hereinbefore  indicated. 

I  need  not  advocate  the  necessity  or  advantages  of  a  uniform 
system  of  accounts  or  statistics,  for  that  is  behind  the  railroads  in 
North  America,  which  are  devoting  their  energies  to  settling  the 
few  remaining  points  in  connection  with  the  prescribed  accounts, 
in  such  a  way  as  to  make  the  system  finally  effective  and  adapted 
to  the  varying  interests  of  the  weak  as  well  as  the  strong  roads, 
and  to  those  companies  which  must  observe  special  charter 
requirements  of  the  States  or  Provinces  in  which  they  are  incor- 
porated. That  such  advancement  has  been  made  is  not  due 
to  any  inherent  virtue  in  American  railway  management,  but 
rather  to  the  necessities  of  development  and  management  already 
alluded  to,  which  were  stronger  than  any  inherent  inclinations. 

The  experience  of  American  railways  removes  all  doubt  as  to 
the  results  achieved  by  vital  statistics,  in  the  hands  of  those 
directing  and  operating  the  various  lines.  Rates  have  fallen, 
operating  expenses,  taxes  and  other  charges  increased,  but  the 
growth  of  traffic  has  been  handled  with  greater  economy  because 
the  operating  and  traffic  officers  had  full  statistics  for  their  con- 


638  BUSINESS  STATISTICS 

stant  reference  and  warning,  and  these  statistics  were  available 
for  use  in  various  forms  very  soon  after  the  trafl&c  was  moved  or 
the  expense  incurred.  The  remedies  have  been  applied  in  the 
shape  of  larger  cars,  larger  train  loads,  and  cars  constructed  of 
more  durable  materials,  larger  and  more  scientifically  designed 
freight  classification-yards  and  facilities,  and  the  use  of  a  large 
part  of  the  surplus  income  for  improvements  of  the  grades, 
alignments  and  facilities,  thereby  restricting  capital  charges  and 
making  dividends  a  permanent  feature  by  deferring  them  until 
the  condition  of  the  railway  and  its  equipment  justified  their 
payment. 

In  stating  these  facts,  I  do  not  lay  claim  to  any  superiority  for 
American  methods,  nor  am  I  oblivious  to  the  progress  in  account- 
ing and  statistics  made  by  the  railways  of  other  countries,  from 
which  we  may  learn  a  great  deal. 

The  railroads  in  North  America  have  by  consoHdation  and 
afl&hations  developed  into  large  systems,  each  embracing  from 
a  few  thousand  to  several  thousand  miles  of  main  running  tracks, 
so  that  it  is  impossible  to  manage  them  efficiently  without  the 
assistance  of  vital  and  comprehensive  accounts  and  statistics  of 
the  service  performed,  the  volume  and  character  of  the  business 
done,  the  revenues,  costs,  and  net  revenues  therefrom,  and  com- 
parisons with  other  periods  compiled  in  such  a  way  as  to  aid  the 
efficient  direction  and  management  of  the  property,  by  quicken- 
ing responsibility  from  the  highest  to  the  lowest,  and  from  the 
lowest  to  the  highest  officer.  In  America,  there  is  less  time  and 
no  more  money  to  be  wasted  on  statistics,  unless  useful,  than  in 
any  other  part  of  the  world. 

(a)  I  take  the  broad  ground,  and  from  the  Hst  herein  stated  it 
will  be  conclusive  that  no  special  statistic  is  believed  to  tell  the 
whole  story  without  others  to  supplement  and  correct  it.  All 
statistics  kept  should  demonstrate  their  utility,  and  if  not  demon- 
strated should  be  abandoned.  Scarcely  any  two  officers  derive  a 
like  value  from  a  similar  statistical  statement  because  of  their 
personal  characteristics  and  service  in  which  they  received  their 
training,  or  because  the  traffic  or  problems  of  their  respective 
divisions  differ  radically,    (b)  No  matter  what  statistics  are  pre- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  639 

pared,  it  will  always  require:  (i)  personal  knowledge  of  the  road, 
its  traffic,  working  conditions,  all  standards  properly  to  interpret 
them,  so  that  they  will  act  as  a  guide,  and  quicken  that  respon- 
sibility which  results  in  efficient  operating  results,  and  (2)  men  of 
ability,  experience  and  loyalty  to  produce  such  results.  These 
results  cannot  now-a-days  be  achieved  until  the  sense  of  respon- 
sibility and  some  sort  of  comparative  costs  and  results  are  given 
to  foremen,  section  men,  station  masters,  yard  masters,  agents 
and  train  masters,  as  well  as  officers,  so  as  to  give  them  facts 
covering  the  cost  of  labor  and  supplies  involved  in  their  own  work, 
and  gradually  interest  them  towards  greater  efficiency  by  elimi- 
nating waste  of  materials,  time,  and  effort.  This  field  is  still  a 
large  and  fruitful  one,  and  the  costs  involved  are  too  large  to  take 
chances  on  results,  (c)  Unless  statistics  reach  operating,  traffic, 
and  administrative  officers  within  a  relatively  short  time  after  the 
operations  have  taken  place,  their  value  is  largely  lost,  and  they 
then  serve  purposes  of  record  only.  This  can  only  be  done,  with- 
out duplicating  working  forces,  by  the  close  working  of  the 
operating  and  auditing  officers,  (d)  Each  operating  and  traffic 
officer  should  have  one  or  two  recognized  daily  statistics,  sum- 
marized by  weeks  and  for  the  month,  agreed  upon  with  the 
auditing  officers,  depending  upon  the  character  of  the  division 
(i.  e.,  whether  it  is  one  fed  by  traffic  from  other  divisions,  or  is  a 
division  located  in  strictly  competitive  territory  where  traffic 
originates,  or  has  other  special  features)  to  keep  him  in  touch 
with  actual  operating  conditions  upon  his  division  affecting 
operating  efficiency  and  costs.  The  poorer  the  railway,  the 
greater  the  necessity  for  knowledge  of  this  character,  and  the 
greater  the  necessity  for  cooperation  between  operating  traffic 
and  accounting  officers.  When  weekly  or  monthly  statistics  for 
a  division  are  furnished,  a  separation  should  be  made  between  the 
statistics  subject  to  the  control  of  the  operating  officer  from  those 
over  which  he  has  no  control,  or  only  partial  control,  and  a  clear 
comparison  of  both  sets  of  statistics  given  with  a  similar  month 
and  period  in  the  previous  year.  Divisional  operating  officers, 
through  the  medium  of  monthly  divisional  income  and  expense 
accounts,  should  be  given  the  facts  regarding  the  proportion  of 


640  BUSINESS  STATISTICS 

the  fixed  and  other  obligatory  charge  of  the  company  which  the 
earnings  of  their  division  are  expected  to  meet,  over  and  above 
the  operating  and  maintenance  charge.  The  latter  quickens  a 
responsibility  for  earning  a  good  margin  over  operating  expenses, 
and  broadens  the  view  of  the  officer,  (e)  A  definite  classification 
must  be  uniformly  observed  so  that  the  statistics  will  at  all  times 
convey  the  same  meaning  and  insure  proper  comparison  with  the 
same  items  for  similar  previous  periods  of  the  same  road  or 
division  with  itself  but  not  necessarily,  however,  with  those  of 
any  other  railroad.  (/)  Railway  revenues  and  expenses  should  be 
absolutely  separated  from  all  other  operations  which  the  com- 
pany conducts  or  in  which  it  is  interested,  (g)  In  no  system  of 
uniform  accounts  should  the  desire  for  special  information  by 
railway  or  government  officials  lead  them  to  make  arbitrary 
decisions  which  strip  the  operating  expenses  of  everything  except 
bare  maintenance  charges,  and  force  all  above  that  into  the 
capital  accounts.  In  the  interest  of  the  public  and  the  railways 
the  capital  accounts  should  be  limited  as  much  as  possible,  and 
every  encouragement  given  to  make  adequate  charges  to  expenses, 
since  all  transportation  officers  naturally  try  to  keep  their 
expenses  down  rather  than  up,  and  so  prove  their  superior 
operating  methods.  Charges  in  excess  of  ordinary  maintenance 
can  be  so  shown  in  the  accounts  that  uniformity  will  not  be  out- 
raged. In  the  desire  to  standardize  accounts,  the  efforts  should 
be  confined  to  principles  and  not  to  details  of  management,  for 
it  must  be  remembered  that  each  railroad  is  a  problem,  and  any 
attempt  to  mould  all  railroads  to  one  pattern  will  eventually  be 
found  ill-advised  on  the  part  of  the  regulator,  hurtful  to  the 
regulated,  and  an  incubus  on  individual  and  corporate  efficiency. 
(h)  While  the  American  accounting  and  statistical  system  is  not 
absolutely  perfect,  I  do  not  know  that  it  is  excelled  anywhere.  It 
has  proved  its  benefit  to  the  railroads,  and  enables  investments  in 
railroad  securities  to  be  made  on  a  clear  knowledge  of  the  physi- 
cal and  financial  conditions  of  the  companies. 

The  railways  and  their  transportation  services  are  deemed  to  be 
of  a  public  nature,  because  the  State  confers  upon  them  the  power 
to  condemn  and  appropriate  land  for  their  purposes  subject  to 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  64 1 

the  payment  of  the  proper  value  therefor,  and  because  of  the 
dependence  of  the  community  upon  the  transportation  service. 
So  far  as  the  right  of  eminent  domain  is  concerned,  the  railways 
avail  themselves  of  it  only  as  a  last  resort,  after  exhausting 
private  negotiations,  because  of  the  excessive  prices  awarded  by 
court  juries  or  commissioners  compared  with  the  actual  value  of 
the  land.  Although  the  railways  are  privately  owned,  they  are 
nevertheless  granted  this  right  because  the  use  of  the  land  is  for 
the  public  benefit.  The  real  reasons  why  the  railways  are  a  public 
benefit  are  because  (i)  they  enrich  the  landowner  from  whom  the 
right  of  way  must  be  purchased;  (2)  they  create  wealth  for  the 
State,  municipalities,  and  country  through  which  the  lines  are 
constructed,  by  furnishing  the  means  for  the  development  of 
natural  resources,  manufactures,  and  other  commodities,  quickly 
and  cheaply  bringing  them  to  the  proper  market;  (3)  they  increase 
the  revenues  of  the  community  by  liberal  payments  of  taxes; 
(4)  they  constantly  enlarge  and  improve  their  facilities;  (5)  they 
precede  instead  of  follow  the  settler,  thereby  stimulating  popula- 
tion and  greatly  extending  and  serving  the  wants  of  the  com- 
munity as  well  as  adding  to  the  ability  by  which  such  wants  or 
luxuries  are  supplied  and  satisfied;  (6)  they  furnish  a  reliable 
avenue  for  investments  of  home  and  foreign  money  and  steady 
employment  for  large  bodies  of  all  grades  of  laborers,  artisans, 
clerks  and  professional  men;  (7)  and  they  open  a  large  and  con- 
stant market  for  all  kinds  of  materials  and  supplies  consumed  over 
an  extensive  area. 

Their  permanence  insures  prosperity  to  the  community  and 
while  other  industries  may  come  and  go  with  only  a  temporary 
or  partial  effect,  all  suffer  when  the  transportation  service  ceases 
or  becomes  insufiicient. 

It  would  be  idle  to  deny  that  we  are  living  in  a  new  era  of 
progress,  in  which  the  standards  of  living  and  practice  have 
been  materially  improved,  and  railways  and  other  transportation 
agencies  have  played  no  small  part  in  disseminating  these  higher 
standards  of  living  and  intelligence  throughout  the  world.  They 
minister  to  the  supply  and  demand  of  the  whole  world,  break 
down  the  barriers  of  racial  prejudice  and  provincialism,  especially 


642  BUSINESS  STATISTICS 

the  railways  in  a  country  of  extensive  natural  resources  and 
population  like  North  America,  and  nothing  can  permanently 
affect  the  existence  of  the  railways,  the  service  they  render,  or  the 
charges  for  such  service,  that  is  not  communicated  to  those 
countries  who  look  to  it  as  the  sources  for  agricultural,  mineral, 
forestry  and  manufacturing  products  and  to  their  citizens  who 
have  invested  their  capital  therein. 

These  factors  have  created  a  demand  in  all  countries  for  the 
standardization  of  railways  as  well  as  inquiries  regarding  their 
operating  and  financial  results,  and  for  the  use  of  standard  units 
by  which  these  results  may  be  conveyed  in  unmistakable  form 
and  substance.  Uniformity  of  accounting  and  statistics  will 
never  admit  of  an  actual  and  final  comparison  of  one  railway  with 
another  without  a  full  knowledge  of  all  the  facts  and  conditions, 
nor  will  average  statistics  ever  form  a  reliable  rate-making  basis, 
although  in  the  days  of  keen  competition  these  figures  were  a 
guide  to  that  end  and  when  uniformly  kept  for  a  series  of  years 
are  a  great  advantage.  It  would  nevertheless  be  a  distinct  gain 
to  the  railway  profession,  to  those  whose  moneys  are  invested 
therein,  and  to  the  governments  from  which  railway  powers  are 
derived,  if  this  responsibility  were  so  appreciated  that  a  uniform 
system-  of  railway  reports  and  particularly  a  uniform  system  of 
operating  statistics,  so  far  as  the  same  can  be  made  uniform,  were 
to  be  adopted  by  the  International  Railway  Congress. 

VIII.  Railroad  Statistics  ^ 

By  a.  a.  Goodchild 

Statistics  have  been  defined  as  "  the  disciplining  of  a  property." 
They  may  be  said  generally  to  group  themselves  into  two  classes. 
In  the  first  class  are  those  which  show  results  of  operation,  such 
as  the  more  general  statements  found  in  annual  reports;  in  the 
second  class,  such  statistics  as  are  devised  for  the  purpose  of 
checking  details  of  operation  with  a  view  to  improving  results.  It 
would  be  impossible  in  this  paper  to  discuss  all  phases  of  railroad 

1  Railroad  Gazette,  vol.  40,  No.  3,  pp.  65-68.    Reprinted  by  permission  of 
Railway  Age  Gazette.    Illustrations  of  forms  are  omitted. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  643 

Statistics.  The  field  is  too  large.  We  must  pass  over  such  inci- 
dentals to  a  large  railroad  as  the  newsboys,  sleeping  and  dining 
cars,  telegraphs,  hotels,  dining  rooms  and  steamships,  which 
must  all  be  scrutinized  and  analyzed  in  order  to  satisfy  the  man- 
agement that  these  various  branches  of  the  service  are  being 
operated  satisfactorily.  Every  station  on  the  line  must  have  its 
records  laid  bare  and  every  phrase  of  revenue  must  be  looked 
after.  Do  receipts  per  passenger  or  per  ton  of  freight  keep  up  ? 
What  are  the  causes  for  the  upward  or  downward  tendency  in  the 
ton-mile  or  passenger-mile  rate  ?  What  is  the  average  journey 
per  passenger  or  average  haul  of  merchandise  ?  Are  too  many 
cars  or  trains  being  run  for  the  amount  of  business  being  done  ? 
Are  the  freight  cars  properly  loaded  ?  Is  there  cross-hauling  of 
empty  cars  ?  What  is  the  percentage  of  empty  to  loaded  cars  ? 
These  and  many  other  similar  questions  are  the  stuff  of  which 
statisticians^  dreams,  and  some  railroad  officials'  nightmares,  are 
made;  questions  which  require  an  answer,  not  only  for  the  entire 
road,  or  for  a  superintendent's  division,  but  for  a  superintendent's 
district  or  an  operating  section  of  that  district. 

From  60  to  70  per  cent  of  the  entire  operating  expenses  of  a 
railroad  are  made  up  from  payrolls,  and  the  importance  of  closely 
watching  the  returns  pertaining  to  these  payrolls,  whether  the 
outlay  is  incurred  in  the  direct  production  of  revenue,  or  for  the 
purpose  of  keeping  rolling  stock  and  roadbed  in  proper  condition, 
cannot  be  overestimated.  The  large  items  of  payroll  expense  are, 
of  course,  trainmen,  enginemen  and  station  agents.  Trainmen 
and  enginemen  are  well  taken  care  of  by  comparison  with  train 
or  engine  mileage,  and  station  agents  by  comparison  with  the 
amount  of  business  done  at  the  individual  station.  The  staff 
necessary  for  the  upkeep  of  roadbed,  buildings  and  bridges  is 
largely  fixed  by  the  management,  and  the  necessary  authority  or 
appropriation  granted  for  any  work  of  a  special  nature  as  distinct 
from  the  general  working  expense.  Roundhouse  expenses  can 
conveniently  be'  set  off  against  the  number  of  engines  dispatched 
and  boilers  washed,  while  the  wages  paid  for  maintenance  of 
equipment  may  for  general  purposes  be  compared  with  the 
mileage  made  by  cars  or  locomotives.    This  latter  expense,  how- 


644  BUSINESS  STATISTICS 

ever,  should  be  considered  for  a  series  of  months,  rather  than  for 
any  particular  month,  because  cars  and  locomotives  are,  as  far  as 
possible,  repaired  when  least  required  for  business  on  the  road. 
Provided  a  railroad  keeps  a  separate  record  of  its  running  repairs 
as  distinct  from  its  heavy  or  shop  repairs  —  a  practice  in  every 
way  desirable  —  the  running  repairs  can  safely  be  criticized  each 
month,  by  comparing  the  outlay  with  the  work  performed.  In 
this  connection,  it  would  be  well  if  the  master  mechanics  at  their 
next  annual  convention  should  place  on  record  their  views  as  to 
what  properly  constitutes  a  charge  for  running  repairs  for  both 
locomotives  and  cars.  The  various  roads  would  then  have  a  fair 
figure  by  which  to  compare  themselves  with  each  other,  provid- 
ing, of  course,  that  the  basis  for  arriving  at  the  work  performed 
was  uniform.  With  locomotives  it  should  not  be  a  difficult  matter 
to  arrive  at  a  standard  basis.  If  a  running  repair  was  understood 
to  include  all  repairs  costing  $ioo  or  less  for  labor,  and  the  loo  per 
cent  capacity-mileage,  hereafter  referred  to,  was  recognized  as  the 
standard  unit,  a  good  basis  of  comparison  would  at  once  exist, 
namely,  cost  of  running,  and  by  deduction,  other  repairs  per  loo 
per  cent  capacity-mile.  With  cars,  the  problem  differs  somewhat, 
but  there  does  not  appear  to  be  any  insuperable  difficulty  in 
handling  them  on  a  similar  basis,  by  defining  a  running  repair, 
and  also  fbdng  upon  a  unit  of  capacity  similar  to  the  loo  per  cent 
locomotive-capacity.  Of  course,  the  large  number  of  cars  in  use 
complicates  matters  somewhat,  and  the  suggestion  is  put  forward 
with  a  view  of  getting  this  question  discussed. 

Such  statistics  as  are  necessary  for  the  purposes  above  outlined 
are  more  or  less  of  a  general  nature,  and  their  value  to  the  man- 
agement of  a  road  is  much  or  little,  just  so  far  as  the  detailed 
analysis  of  the  various  comparisons  is  comprehensive,  and  no 
farther.  Considerable  time  of  officials  and  their  staffs  is  fre- 
quently lost  in  replying  to  criticisms  based  on  such  general 
statistics,  due  to  the  immature  condition  or  lack  of  detail  back  of 
them.  Instances  are  not  rare  where  an  official  has  been  roughly 
handled  by  the  management  for  an  apparently  poor  record,  for 
which,  upon  investigation  and  more  complete  analysis  of  the 
situation,  he  has  been  completely  exonerated.    This,  after  labor- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  645 

ing  under  a  stigma  extending  anywhere  from  a  week  to  two  or 
three  months,  ahnost  insensibly  tends  to  harden  that  official's 
mind  against  such  general  statistics,  whereas  with  proper  data 
available  in  the  first  place,  the  loss  of  time  and  annoyance  would 
have  been  avoided. 

When  one  speaks  of  statistics,  the  inference  is  almost  natural 
that  train  and  locomotive  performance  are  specially  implied,  and 
while  each  of  the  matters  already  touched  upon  affords  a  large 
field  for  discussion,  the  fact  is  that  of  all  branches  of  statistics 
that  relating  to  train  and  locomotive  movement  is  the  most 
important.  The  revenue  derived  from  freight  traffic  usually 
represents  about  70  per  cent  of  the  entire  revenue  of  an  American 
railroad,  and  while  the  expenses  incidental  thereto  do  not  form 
such  a  large  percentage  of  the  total  operating  expenses,  the  pro- 
portion is  sufficiently  large  to  demand  the  closest  possible  analysis. 
Passenger  business  is  to  some  extent  the  creature  of  circum- 
stances; it  is  also  in  part  governed  by  local  conditions  or  con- 
siderations, and  whether  a  train  pays  or  not,  it  sometimes  happens 
that  legislative  requirements,  or  the  irresistible  demands  of  an 
enlightened  public,  compel  a  company  to  furnish  service  not 
warranted  by  the  financial  returns.  Competition  also  sometimes 
has  here  an  important  bearing.  Owing  to  these  special  conditions 
statistics  relating  to  passenger-train  performance  have  not  the 
same  disciplinary  value  as  have  those  relating  to  freight  traffic; 
but  while  these  conditions  exist  there  are  certain  features  of 
passenger-train  work  which  cannot  be  overlooked,  such  as  com- 
parative fuel  performance  and  repairs,  and  subsequent  reference 
to  these  branches  of  statistical  information  for  the  freight  train 
service  may  be  applied  to  that  of  passenger  trains  also. 

Until  within  a  comparatively  recent  period  it  was  considered 
sufficient  to  know  only  the  distance  traveled,  as  shown  by  train 
and  locomotive  mileage,  to  criticize  confidently  a  superintendent 
on  his  train  performance,  or  a  master  mechanic  on  his  locomotive 
performance.  Train  mileage  at  first  glance  looks  innocent  enough, 
but  has  proved  misleading.  It  does  not  take  into  account  the 
number  of  cars  in  a  train,  and  it  ignores  the  fact  that  perhaps  two 
or  three  engines  were  used  to  haul  the  train,  one  possibly  capable 


646  BUSINESS  STATISTICS 

of  hauling  3,cx)o  tons,  while  another  could  handle  only  1,200  tons. 
More  than  this,  statistics  based  on  train  mileage  fail  to  furnish 
any  information  as  to  the  financial  benefits  obtained  by  outlays 
of  capital  for  the  reduction  of  grades  and  curves,  or  to  supply  any 
basis  for  arriving  at  the  saving  in  cost  of  transportation  effected 
by  the  introduction  of  larger-capacity  locomotives  and  cars. 
Locomotive  mileage,  as  a  basis  of  criticism  of  locomotive  per- 
formance, has  also  signally  failed,  for  similar  reasons.  With  the 
large  investments  of  capital  made  during  recent  years  for  the 
purchase  of  large-capacity  locomotives  and  cars,  it  was  but  natural 
that  the  cost  per  train  or  locomotive  mile  should  show  consider- 
able increase  for  fuel  and  repairs,  and  it  was  necessary  for  a  new 
unit  to  be  introduced  which  would  contain  at  least  the  elements  of 
weight  and  distance,  and  so  we  have  what  is  called  the  "  ton- 
mile  "  unit.  This  unit,  when  used  in  conjunction  with  train  or 
locomotive  mileage,  has  now  become  the  principal  basis  of  analysis 
in  the  railroads  on  this  continent,  and  by  its  use  it  becomes  pos- 
sible to  arrive  at  the  results  obtained  from  capital  investments  for 
the  betterment  of  the  line,  and  to  obtain  a  fair  index  of  operating 
efficiency  on  individual  sections  of  a  road. 

The  need  for  a  unit  which  should  combine  the  features  of  loco- 
motive-capacity, tonnage  hauled  and  distance  traveled,  became 
evident  as  soon  as  modern  large  locomotives  began  to  be  used,  for 
it  was  found  that  the  superintendent  who  happened  to  have  the 
larger  power  on  his  division  could  do  all  the  shouting  when  it 
came  to  a  question  of  the  size  of  train,  or  of  tons  hauled  per  train 
mile;  and  while  it  was  a  simple  matter  for  the  statistician  to 
explain  that  Mr.  Jones  ought  to  make  a  better  showing  than  Mr. 
Brown,  because  he  had  larger  engines  to  work  with,  it  was  not 
considered  good  statistics  to  stop  there,  for  there  was  a  possibility 
that  Mr.  Brown  was  really  doing  better  work  than  Mr.  Jones, 
considering  the  power  at  his  disposal.  Such  a  unit  was  designed 
and  put  into  use  on  the  Canadian  Pacific  by  the  writer,  nearly 
three  years  ago,  and  was  called  the  100  per  cent  capacity  unit. 
It  was  decided  that  the  only  fair  way  to  deal  with  the  question 
was  to  bring  all  available  power  to  the  100  per  cent  basis  which 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  647 

represents  20,000  pounds  pull  on  drawbar;  show  the  quantity  of 
power  each  superintendent  had  to  dispose  of,  and  set  off  against 
that  quantity  the  actual  work  performed.  Incidentally  it  might 
be  said  that  this  unit  has  proved  a  valuable  one  for  purposes  of 
comparison  in  connection  with  locomotive  repairs.  Another 
question  still  arises:  ''  What  percentage  does  your  actual  freight 
ton-mileage  bear  to  the  potential  freight  ton-mileage  ?  "  In 
other  words,  if  a  150  per  cent  engine  is  capable  of  hauling  2,000 
tons  over  a  given  section  of  the  road,  100  miles  long,  at  an  average 
speed  of  1 2  miles  per  hour,  it  has  a  potential  freight  ton-mileage  of 
17,280,000  ton-miles  per  month  of  30  working  days  of  24  hours 
each.  We  all  know  that  a  large  portion  of  an  engine's  time  is  used 
up  in  the  roundhouse  or  shops  for  repairs,  a  considerable  portion 
occupied  in  taking  on  fuel  and  water  or  in  switching  and  light 
running,  but  were  the  actual  percentage  of  lost  potential  power 
figured  out  the  results  would  probably  be  startling.  Why  not 
compare  one  superintendent's  division  with  another  on  this  basis 
for  a  month  every  now  and  then  ? 

Very  few  roads  are  as  yet  taking  any  cognizance  of  the  matter 
of  "  speed  "  in  their  statistics.  A  unit  which  will  incorporate  this 
factor  is  not  only  desirable,  but  imperative,  for  it  carries  in  itself 
reconciliation  of  those  diverse  interests,  the  transportation  and 
mechanical  departments.  Under  the  present  system,  an  engineer 
who  brings  his  train  in  on  schedule  time,  and  transforms  his  power 
into  speed,  frequently  finds  it  necessary,  in  so  doing,  to  make 
increased  demands  on  the  coal  pile  and  "  his  ton-miles  per  ton  of 
coal  "  presents  a  wretched  appearance.  The  superintendent  or 
dispatcher  discovers  a  "  gem  "  of  an  engineer,  while  the  master 
mechanic  puts  a  big  black  mark  against  the  performance.  Per 
contra,  the  engineer  who  converts  his  power  into  load  is  a  model 
driver  from  the  master  mechanic's  point  of  view,  but  the  super- 
intendent will  probably  avail  himself  of  the  first  opportunity  of 
calling  him  down  hard.  The  engineer  naturally  becomes  dis- 
couraged, and  may  be  pardoned  if  his  language  is  more  forcible 
than  polite  with  reference  to  statistics  in  particular.  What  is 
necessary  is  a  unit  which  will  give  the  engine  and  the  engineer 


648  BUSINESS  STATISTICS 

credit  for  the  full  amount  of  power  expended,  both  in  attainment 

of  speed  and  hauling  of  load,  and  the  opinion  that  such  an  unit 

would  be  found  by  taking  the  minutes  occupied  in  actual  running 

between  terminals  and  dividing  the  figures  into  the  ton-miles 

hauled  per  100  per  cent  of  capacity  seems  justified.    It  might  be 

called  the  *'  operating  unit."    Fuel,  or  pounds  of  coal  used  per 

operating  unit,  should  then  furnish  statistics,  satisfactory  at 

once  to  the  mechanical  and  transportation  departments. 

There  is  one  other  suggestion  with  a  view  of  bettering  present 

day  methods,  and  it  relates  to  the  direction  of  traffic.    Most  roads 

divide  their  statistics  as  between  east  and  westbound  or  north 

and  southbound.    Such  division  may  be  useful  as  denoting  the 

general  trend  of  traffic,  but  it  seems  more  than  probable  that  a 

further  subdivision  setting  forth  such  traffic  as  in  the  direction  of 

the  balance  of  traffic,  as  distinct  from  that  in  the  direction  of 

returning  power,  would  be  a  better  basis  from  which  to  criticize 

locomotive  or  train  performance.     With  the  present  system, 

assuming  the  balance  of  tonnage  for  an  entire  month  is  eastbound, 

it  is  possible  that  during  a  large  portion  6f  the  month  the  balance 

was  in  the  opposite  direction,  and,  as  a  consequence,  eastbound 

results  as  shown  are  misleading,  and  the  good  actually  attained 

by  careful  loading,  proper  handling  of  empty  cars,  and  economical 

fuel  performance  is  largely  lost  sight  of.     The  tonnage  rating 

system  in  use  on  the  Canadian  Pacific  was  fully  discussed  by  Mr. 

Thomas  Tait  in  a  paper  read  before  the  New  York  Railway  Club 

in  January,  1901  {Railroad  Gazelle,  Jan.  18,  1901),  and  it  is  not 

necessary  to  refer  to  the  matter  further  than  to  state  that  with 

the  aid  of  tables  or  charts,  which  are  available  for  the  use  of  all 

transportation  officials  and  employees,  it  is  simply  a  matter  of 

reference  to  determine  the  size  of  load  an  engine  of  any  capacity 

should  haul  over  any  section  of  the  entire  Canadian  Pacific 

system.    The  engine  capacity  can  be  found  by  reference  to  the 

engine  list  printed  on  the  cover  in  which  these  charts  are  bound, 

the  figures  being  arrived  at  by  the  generally  accepted  formula 

C^  X  S  X  P 
for  single  expansion  locomotives  =  T  in  which 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  649 

C  =  Diameter  of  cylinder  in  inches. 

S  =  Stroke  of  piston  in  inches. 

P  =  Mean  effective  pressure  in  pounds  (85  per  cent 
boiler  pressure). 

D  =  Diameter  of  driving  wheels  in  inches. 

T  =  Traction  power  in  pounds. 
Mr.  Tait^s  paper  also  explained  the  method  by  which  the  pre- 
scribed allowance  for  the  extra  resistance  due  to  the  proportion  of 
tare  being  greater  than  one-third  of  the  actual  gross  tonnage,  and 
the  figure  termed  "equivalent  tonnage,"  is  arrived  at.  This 
"  equivalent  tonnage  "  is  used  not  only  for  the  proper  loading  of 
engines,  but  as  a  basis  for  criticizing  the  engineer's  fuel  perform- 
ance, and  with  such  an  equitable  figure,  the  excuse  that  ''my  train 
was  all  empties,  while  Bill  had  all  loads  and  ought  to  have  a 
better  record  than  I,"  cannot  be  advanced. 

The  importance  attaching  to  an  economical  fuel  performance  is 
manifested  in  the  close  attention  which  is  being  given  to  the  ques- 
tion by  all  railroads,  and  when  the  vast  amount  of  money  involved 
in  the  item  of  "  fuel  "  is  borne  in  mind  such  interest  cannot  be 
wondered  at.  Many  devices  have  been  invented  with  a  view  to 
securing  correct  returns  of  fuel  consumed,  and  apart  from  the 
methods  of  delivery,  which  is  a  problem  that  railroad  manage- 
ments must  themselves  be  satisfied  upon,  the  question  of  account- 
ing for  deliveries  as  recorded  is  one  of  considerable  difficulty. 
This  is  done  on  the  Canadian  Pacific  by  an  "  enginemen's  trip 
ticket,"  form  67E.  On  the  lower  portion  thereof  is  the  fuel 
coupon  "  C."  This  ticket  is  made  in  triplicate,  the  first  two 
sheets  having  carbon  backs.  The  book  of  tickets  belongs  on 
the  engine  and  must  not  be  taken  away  by  the  engineer.  When 
a  quantity  of  coal  is  put  on  a  tender  the  fuel  man  enters  the 
amount  on  coupon  '' C  "  i,  and  tears  out  the  dupHcate  copy, 
which  is  forwarded  to  the  fuel  department  as  a  voucher.  At 
the  end  of  the  trip  the  engineer  estimates  the  quantity  of  coal 
remaining  on  the  tender,  and  records  same  in  space  provided 
on  coupon  "  C."  He  then  deducts  this  from  the  quantity 
shown  to  be  on  hand  at  the  commencement  of  the  trip,  thus 


650  BUSINESS  STATISTICS 

arriving  at  the  quantity  actually  used,  which  he  also  enters 
in  the  space  provided.  The  entire  front  sheet  of  this  ticket  is 
detached  and  sent  to  the  statistical  office  by  first  train,  after 
having  been  noted  and  approved  by  the  locomotive  foreman  at 
destination  point.  Questions  sometimes  arise  as  to  the  correct- 
ness of  the  estimate  of  quantity  left  on  tender  by  the  engineer 
making  the  succeeding  trip,  against  whom  such  quantity  is 
charged;  but  the  locomotive  foreman  or  hostler  has  authority  to 
settle  such  differences  of  opinion,  and  disputes  are  not  frequent. 
When  it  is  stated  that,  with  the  use  of  this  ticket,  the  figures 
arrived  at  by  the  statistical  officer  show  variation  of  consider- 
ably under  i  per  cent  with  those  of  the  fuel  department,  it 
would  seem  that  the  question  of  accounting  for  fuel  issues  has 
been  practically  solved. 

Oil  and  waste  supplies  for  locomotives  are  handled  in  a  some- 
what similar  way.  The  oil  coupon  "  B,"  on  the  same  trip  ticket, 
is  made  out  for  the  necessary  supply  of  oil,  and  is  signed  by  the 
man  who  receives  it,  and  coupon  "  B  "  is  detached  from  the 
second  sheet  as  a  stores-department  voucher.  It  has  been  found 
convenient  for  the  statistical  office  to  accept  the  statement  of 
issues  as  compiled  by  the  stores  department  from  these  coupons, 
rather  than  make  up  an  independent  record,  but  it  is  at  all  times 
a  simple  matter  to  check  either  the  stores  or  fuel  department's 
charges  by  referring  to  the  tickets.  The  question  of  devising 
some  method  of  checking  the  quantity  of  the  different  kinds  of 
oil  used  more  effectively  and  simply  than  the  present  method  of 
figuring  the  miles  run  per  pint  is  occupying  attention.  The 
Canadian  Pacific  has  in  use  what  is  termed  an  excess  oil  ticket, 
and  if  an  engineer  requires  a  quantity  of  oil  in  excess  of  the 
schedule  allowance  for  the  run,  he  must  fill  out  one  of  these  excess 
slips  and  hand  it  to  the  locomotive  foreman  for  approval,  with  a 
brief  statement  of  the  reasons  for  his  requirements.  Should  the 
locomotive  foreman  approve  this  slip,  he  makes  a  requisition  on 
the  stores,  and  sends  the  approved  sUp  to  the  divisional  master 
mechanic,  also  a  copy  attached  to  the  trip  ticket  to  the  statistical 
office.  All  of  which  routine  is  assumed  to  act  as  a  check  on  the 
demands  for  ^'  more  oil."    Mr.  Vaughan  has  recently  suggested 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  6^1 

a  statement  to  take  the  place  of  the  present  record,  which  will 
show  "  quantity  used,"  "  quantity  as  per  schedule,"  "  quantity 
issued  on  excess  slips,"  and  "  quantity  used  less  than  schedule 
allowance,"  also  the  percentage  which  the  last  two  items  bear  to 
the  authorized  or  schedule  allowance.  A  statement  of  this  sort 
would  not  involve  as  much  work  in  compiling  as  does  the  present 
one  showing  the  "  miles  run  to  a  pint,"  and  the  expensive  engines 
or  engineers  could  readily  be  detected  by  simply  glancing  down 
the  column  "  percentage  of  excess."  "  Miles  run  to  a  pint  "  does 
not  represent  anything  unless  you  know  how  many  miles  should 
be  run  to  the  pint,  and  this  proposed  method  has  the  appearance 
of  being  very  nearly  a  solution  of  an  old  standing  difficulty. 
The  unused  coupons  of  the  engineer's  trip  ticket  are  disposed  of 
as  follows:  Coupon  A2,  enginemen's  record  of  mileage,  is  retained 
by  the  engineer,  while  the  oil  and  fuel  coupons  B2  and  C2  remain 
in  the  book,  which  is  turned  into  the  locomotive  foreman  at  the 
roundhouse  to  which  the  engine  is  attached,  at  the  end  of  each 
month,  or  as  soon  as  all  tickets  are  used,  to  be  retained  by  him  for 
reference  or  check,  should  any  questions  arise  as  to  the  correctness 
of  the  performance  sheet. 

Statistics,  to  be  of  value,  should  be  subdivided  in  such  detail 
as  to  furm'sh  the  results  of  operation  on  the  smallest  subdivision 
of  a  railroad.  With  the  Canadian  Pacific  this  subdivision  is  repre- 
sented by  engine  districts,  which  average  from  100  to  120  miles. 
Comparisons  of  performance  should  only  be  made  by  one  district 
against  itself,  unless  it  is  known  that  the  conditions  are  similar 
in  another  district.  A  study  of  this  matter  of  comparisons  leads 
one  to  the  conclusion  that  much  valuable  time  is  lost  by  endeavor- 
ing to  compare  results  of  trains  on  one  road  with  another,  or  even 
one  division  with  another.  Weather  conditions,  water,  grades 
and  fuel,  have  each  a  share  in  producing  differences  in  cost  which 
it  is  difficult  to  estimate,  but  apart  from  this,  there  is  an  even 
more  serious  difficulty  in  making  comparisons  between  two  or 
more  railroads.  The  data  used  in  compiling  results  are  rarely 
available,  and  when  available  are  still  more  rarely  harmonious. 
By  comparing  one  division  or  district  with  itself  for  a  correspond- 
ing period  the  difficulties  of  water  and  grades  are  largely  elimi- 


652  BUSINESS  STATISTICS 

nated  or  at  all  events  any  change  is  on  record,  and  fairly  reliable 
conclusions  may  be  drawn  from  such  comparisons.  A  locomotive- 
performance  sheet  should  be  so  arranged  that  all  the  engines  on  a 
district  be  shown  side  by  side,  preferably  in  order  of  capacity, 
and  separately  for  each  class  of  service.  This  arrangement 
enables  one  to  appreciate  correctly  the  relative  economic  value  of 
the  different  types  of  engines.  It  has  been  a  pleasure  to  the 
writer  to  see  the  practical  use  to  which  such  an  arrangement  of 
records  was  put  up  by  Mr.  Vaughan  in  his  very  able  paper  on 
superheaters,  for  without  any  further  need  than  a  reference  to  the 
regular  monthly  performance  sheets  of  the  Canadian  Pacific  it 
was  possible  to  arrive  at  exact  data  regarding  the  performance  of 
superheated  locomotives  and  compare  them  with  other  loco- 
motives of  similar  capacity  not  equipped  with  the  superheater 
devices. 

The  forms  used  by  the  Canadian  Pacific  in  compiling  and 
reporting  train  and  locomotive  statistics  may  be  briefly  described. 
The  conductor's  journal,  form  125,  in  conjunction  with  the  engi- 
neer's trip  ticket,  already  described,  is  the  basis  of  the  entire 
records.  The  necessary  information  is  abstracted  on  form  S.O.i 
and  worked  up  on  the  train  and  locomotive-performance  sheets. 
Each  engine  on  each  section  of  the  road  is  given  a  separate 
card  (form  S.O.i)  for  each  class  of  service  in  which  it  is  engaged, 
provision  being  made  on  the  top  of  each  card  for  the  engine 
number  by  a  series  of  "  tags  "  running  from  i  to  10  —  for  the 
last  figure  of  the  number.  This  card  is  opened  from  the  train 
dispatcher's  sheets,  the  first  entry  being  the  date  of  trip  which 
is  taken  therefrom.  The  engineer's  trip  ticket  is  then  taken  and 
the  fuel  used  on  trip  entered,  while  from  the  conductor's  journal 
is  entered  all  information  relating  to  train  and  locomotive  mileage 
—  car  mileage,  tonnage,  etc.,  as  provided.  This  method  ensures 
a  triplicate  check  of  the  entries  on  the  card.  At  the  close  of  the 
month  or  week,  or  as  often  as  such  record  is  required,  the  cards 
are  added  up  and  the  locomotive-performance  sheet  (form  S.O.60) 
is  compiled  directly  from  them.  This  sheet  can  be  issued  within 
two  days  after  the  close  of  the  period  for  which  such  information 
is  desired.    The  generality  of  locomotive-performance  sheets  show 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  653 

"  cost  "  of  fuel  and  supplies  against  each  engine.  Such  informa- 
tion is  unnecessary.  The  man  operating  the  engine  has  nothing 
whatever  to  do  with  the  question  of  "  cost,"  but  simply  "  quan- 
tities "  used.  Form  S.O.62,  the  summary  of  locomotive  per- 
formance, properly  takes  care  of  all  expenses  incident  to  the  work 
performed,  including  repairs.  Apart  from  the  consideration  of 
total  cost  of  repairs  compared  with  the  total  work  performed,  all 
details  pertaining  to  repairs  should  be  dealt  with  directly  by  the 
mechanical  department.  For  the  train-performance  sheet,  the 
various  items  of  performance  of  all  trains  operating  on  each 
section  are  summarized,  and  the  totals  of  these  sections  represent 
the  work  done  on  a  superintendent's  division.  A  summary  is 
then  compiled  of  each  general  superintendent's  division  showing 
the  totals  of  each  superintendent's  district,  and  a  final  summary 
of  the  figures  of  each  general  superintendent's  division  gives  the 
grand  result  for  the  entire  Canadian  Pacific  system,  form  S.O.53. 
Having  the  figures  of  work  performed,  it  is  a  comparatively  easy 
matter  to  arrive  at  the  cost  per  ton-mile  for  hauling.  The 
wages  of  enginemen  and  trainmen  are  compiled  in  the  office  of 
the  superintendent  for  each  district  for  which  train  records  are 
compiled;  likewise  the  amount  of  train  supplies,  while  the  oil 
and  waste,  as  before  explained,  is  compiled  from  the  store- 
keeper's statements  of  the  issues  sent  in  to  the  statistical  office. 
The  fuel  is  already  compiled  as  to  quantity,  and  all  that  is 
needed  is  the  price  per  ton  to  arrive  at  its  total  value.  By 
dividing  the  freight  and  equivalent  gross  ton-mileage  into  the 
total  cost  of  each  item,  we  get  the  resulting  average  cost  per  ton- 
mile  for  "  freight  "  or  "  equivalent  gross  "  (form  S.O.52).  This 
average  cost  furnishes  a  very  fair  basis  for  determining  the  profit- 
ableness or  otherwise  of  any  special  trains,  or  any  special  class  of 
business,  on  any  section  or  division  of  the  road,  when  set  off 
against  the  revenue  derived  from  such  business.  The  results 
of  train  operations  and  car  performance  summarized  on  form 
S.0.53  comprise  all  information  necessary  for  a  complete  and 
intelligent  survey  of  the  entire  field  of  train  performance,  with 
this  qualification,  that  the  value  of  item  "  per  cent  of  empty  to 
loaded  cars  "  is  impaired  owing  to  the  fact  that  all  classes  of  cars 


654  BUSINESS  STATISTICS 

in  freight  service  are  comprehended  under  the  general  caption 
''  freight  cars."  It  frequently  happens  that  empty  fiat  cars  are 
being  hauled  eastbound  on  the  same  section  at  the  same  time  as 
box  cars  are  being  hauled  westbound,  and  the  statement  gives  the 
appearance  of  cross-hauling  or  bad  railroading,  which  would  be 
avoided  were  the  movements  of  the  various  classes  of  freight  cars 
kept  separate.  The  great  difficulty  in  the  way  of  working  up 
such  a  record,  as  undoubtedly  should  be  done,  is  one  of  expense, 
although  it  is  quite  possible,  with  the  introduction  of  the 
Hollerith  system  of  tabulating,  that  this  desirable  record  may  be 
obtained  in  an  easy  and  cheap  manner. 

This  question  of  expense  is  the  serious  one  tb  a  railroad  man- 
agement. Statistics  cost  money,  and  some  statistics  are  dear  at 
any  price,  but  what  is  worth  doing  is  worth  doing  well;  and  well- 
devised  statistics  should  without  question  become  to  the  railroad 
company  using  them  a  source  of  profit.  The  return  on.  the  invest- 
ment cannot  be  stated  in  dollars  and  cents,  but  it  can  be  stated 
without  peradventure  that  the  company,  whose  officials  are  best 
posted  in  the  details  of  operation,  is  the  company  which  supplies 
its  officials  with  the  best  possible  analysis  of  work  accomplished. 
It  may  be  further  stated  that  the  official  who  studies  such  analy- 
sis, and  is  guided  thereby,  must  inevitably  lead  the  way  on  the 
division  or  railroad  where  he  is  employed. 

Finally,  there  is  this  to  be  borne  in  mind  about  statistics.  We 
want  to  know  when  we  have  a  sufficiency  of  them.  A  man  may 
eat  a  big  meal,  and  enjoy  it,  but  he  sometimes  suffers  for  it  after- 
wards. Do  not  overdo  the  statistical  food  —  it  may  react.  I 
believe  in  getting  at  the  root  of  a  matter,  and  in  putting  statistics 
in  as  simple  a  form  as  possible,  and  making  them  as  just  as  pos- 
sible to  all  concerned.  I  remember  the  question  coming  up  in 
reference  to  the  fuel  performance  on  a  certain  division,  there 
being  a  very  large  increase  in  consumption  per  i,ooo  ton-miles 
over  the  whole  division.  The  figures  certainly  looked  very  bad, 
but  on  analyzing  them  it  was  found  that  on  every  district  there 
was  a  decrease.  It  was  found  that  traffic  conditions  had  altered 
to  such  an  extent  on  two  expensive  sections  as  to  cause  an  increase 
in  fuel  consumption  per  i,ooo  ton-miles  for  the  division  as  a 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  655 

whole.  I  can  assure  you  this  discovery  made  me  careful  when 
criticizing  results  as  shown  in  statistics  and  impressed  upon  me 
the  necessity  of  getting  down  to  details. 

IX.   Costs  and  Results^ 

By  William  J.  Cunningham 

The  railroads  of  the  United  States,  on  their  245,000  miles  of  line, 
transport  daily  2,750,000  passengers  in  trains  which  run  1,500,000 
miles  per  day.  They  also  move  daily  5,000,000  tons  of  freight  in 
trains  which  make  a  mileage  of  1,750,000.  For  this  service  they 
collect  $7,700,000  per  day,  and  pay  out  for  operating  expenses 
$5,300,000.  Of  this  amount,  $3,200,000  is  paid  in  wages  to 
1,750,000  employees. 

With  the  knowledge  of  the  disbursement  of  such  large  sums  for 
operating  expenses,  it  is  natural  to  inquire  whether  the  railroads 
have  adequate  checks  to  prevent  leakage  and  waste,  and  whether 
in  their  analysis  of  the  operating  results  they  are  as  thorough- 
going and  progressive  as,  for  instance,  large  industrial  concerns. 
In  other  words,  have  the  railroads  established  any  definite  meas- 
ures by  which  they  may  determine  the  efficiency  of  the  many 
operating  elements  which  together  produce  the  intangible  product 
of  transportation  ?  It  is  the  purpose  of  this  article  to  furnish  a 
partial  answer  by  describing  some  methods  employed  to  watch 
operating  expenses,  and  to  suggest  further  steps  which  they  may 
advantageously  take. 

The  principles  and  nearly  all  of  the  details  of  railway  accounting 
are  prescribed  by  the  Interstate  Conamerce  Commission.  By 
law  the  railroads  are  required  to  follow  the  instructions  of  the 
Commission  as  to  when,  how,  and  what  they  shall  report.  The 
official  classification  of  expenses  calls  for  116  primary  accounts. 
The  Commission  directs  specifically  how  to  account  for  the  traffic 
moved  and  the  work  done  (in  engine,  train,  and  car  miles)  in 
moving  it.  It  prescribes  how  the  balance  sheet  shall  be  made  up, 
and  classifies  expenditures  chargeable  to  capital  account.  The 
result  is  that  the  monthly  and  yearly  returns  of  the  Commission 

*  System,  October,  1912,  pp.  384-391.     Reprinted  by  permission  of  System. 
Illustrations  of  charts  are  omitted. 


656  BUSINESS  STATISTICS 

show  comparable  and  fairly  complete  statistics  of  the  volume  and 
nature  of  the  trafiic,  the  average  rates  charged,  the  mileage  made 
by  trains  and  rolling  stock,  and  the  costs  of  operation. 

The  returns  for  expenses,  however,  are  not  so  complete  as  the 
other  figures,  nor  are  they  comparable  between  different  rail- 
roads or  different  sections  of  the  country  because  of  striking  differ- 
ences in  the  division  of  traffic  between  passenger  and  freight, 
and  differences  in  physical  and  operating  conditions.  The  rail- 
roads have  been  left  largely  to  their  own  initiative  and  resource- 
fulness, therefore,  in  developing  a  system  for  checking  costs  and 
utilizing  their  facilities  and  equipment. 

The  operating  expenses  of  the  railways  of  the  United  States  for 
the  fiscal  year  ending  June  30,  191 1,  were  as  follows:  — 

Per  Cent      Per  Cent 
Classification  Total  Expenses      Expenses       Revenue 

Maintenance  of  Way $369,581,610  19.1  13. i 

Maintenance  of  Equipment 431,892,653  22.3  15.3 

Traffic 59,344,441  3.1  2.1 

Transportation ; 1,000,603,053  51.7  35.5 

General 74,046,630  3.8  2.6 

Total,  including  $43,193  unclassified  expenses  $1,935,511,581      loo.o  68.6 

The  first  classification  includes  the  expenses  of  maintaining  the 
roadway,  track,  signals,  buildings  and  other  structures  in  proper 
condition  for  the  safe  and  otherwise  satisfactory  movement  of 
trains.  The  second  embraces  the  costs  of  maintaining  locomo- 
tives, cars,  and  other  rolling  stock  in  serviceable  condition.  The 
third  is  the  sum  spent  for  the  organization  for  securing  traffic  — 
outside  agencies,  advertising,  fast  freight-line  bureaus,  and  so  on. 
The  fourth,  the  most  important,  takes  in  all  expenses  connected 
with  the  movement  of  trains.  The  last  division  includes  the 
general  administrative  expenses. 

The  general  manager  of  a  railroad  is  vitally  interested  in  every 
phase  of  operation,  but  he  is  primarily  charged  with  responsi- 
bility for  the  safe  and  economical  movement  of  traffic,  which 
includes  the  maintenance  of  way,  structures  and  equipment.  It 
is  important,  therefore,  that  he  be  kept  fully  and  currently 
informed  not  only  by  the  ordinary  statistical  returns  prescribed 
by  the  Interstate  Commerce  Commission,  but  also  by  definite 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  657 

measures  of  operating  efficiency  —  statistics  which  take  account 
of  the  differences  of  the  character  of  traffic  and  equipment. 

This  article  will  deal  chiefly  with  some  of  the  statistical  returns 
which  do  not  appear  in  the  published  reports,  and  by  which  the 
supervising  officers  check  the  efficiency  of  the  several  depart- 
ments and  divisions.  The  description  is  necessarily  quite  incom- 
plete, and  will  deal  only  with  station,  yard,  train  and  engine 
service.  These  constitute  about  60  per  cent  of  the  transportation 
group  of  expenses. 

The  description  of  modern  methods  of  controlling  expenditures 
through  statistics  will  be  clearer  if  illustrated  by  a  few  graphic 
charts  selected  from  a  set  compiled  by  one  railroad  in  eastern 
territory.  The  charts  are  prepared  on  thin  paper  so  that  blue 
prints  may  be  made,  and  regularly  each  month  as  they  are 
brought  up  to  date,  copies  are  furnished  to  the  general  and 
division  officials.  It  has  been  found  that  the  charts  arouse  a 
greater  interest  in  the  returns  and  inspire  keen  rivalry  between 
departments  and  divisions  in  their  effort  to  excel. 

Generally  speaking,  graphic  charts  are  not  common  in  railway 
practice,  but  they  are  coming  more  and  more  into  favor  and  their 
use  is  being  extended.    Occasionally  we  find  a  railroad  official 
who  is  prejudiced  against  them.    He  is  inclined  to  regard  them  as 
unnecessary  and  as  a  reflection  upon  his  abihty  to  interpret  the  '/ ' 
figures.    But,  fortunately,  he  is  not  typical,  and  his  number  is 
decreasing.    The  majority  realize  that  the  charts  are  more  effec- 
tive in  their  indication  than  the  figures  alone.    The  curves  give  y^ 
instantaneous  impressions.    They  make  it  possible  for  the  mind 
to  take  in  quickly  a  long  series  of  related  facts,  and  both  the 
actual  and  relative  changes  in  each  when  compared  with  the  l^ 
others  and  with  different  periods.    Briefly,  they  give  the  maxi- 
mum of  information  with  the  minimum  of  mental  effort,  and  they   v  ^ 
are  replete  with  corrective  suggestion.    [Chart  I.   Operating  of 
Coaling  Station.     Curves  plotted  monthly  for  Total  Cost  of 
Operation,  Average  Tons  Hauled  per  Day,  Average  Engines 
Coaled  per  Day,  Average  Cost  per  Ton  of  Coal  Handled.] 

For  instance.  Chart  H  gives  a  bird's-eye  view  of  the  operation 
of  a  freight  station  employing  sixty  or  seventy  men  and  hand- 


658  BUSINESS  STATISTICS 

ling  from  one  thousand  to  sixteen  hundred  tons  of  freight  daily. 
[Curves  plotted  monthly  for  Total  Tonnage,  Track  Freight, 
House  Freight,  Total  Payroll  Expense,  House  Freight  Payroll, 
Track  Freight  Payroll,  Cost  per  Ton-House-Freight,  Cost  per 
Ton-Track- Freight.  With  such  a  "  graph  "  as  this  the  monthly 
changes  in  the  cost  of  operating  a  freight  station  can  be  followed 
and  compared  with  the  outlay  and  results  for  preceding  months 
and  years.]  The  freight  is  of  two  classes:  (i)  that  which  is 
handled  through  the  freight  house  (commonly  known  as  ware- 
house freight) ;  and  (2)  that  which  is  handled  in  carload  lots  and 
loaded  and  unloaded  by  consignor  or  consignee  on  bulk-delivery 
tracks.  The  second  class  is  known  as  track  freight.  At  large 
stations  it  is  customary  for  the  agent  to  have  each  morning  a 
memorandum  statement  showing  the  payroll  expense  of  the 
previous  day,  the  tonnage  handled,  and  the  cost  per  ton.  For 
every  station,  a  monthly  statement  is  prepared  and  "  graphed," 
with  a  final  graph  summarizing  the  totals  and  general  averages 
for  all  freight  stations. 

In  computing  the  cost  of  house  freight  some  roads  include  only 
the  expense  of  the  house  foremen  and  their  clerks,  checkers,  and 
laborers;  others  charge  to  the  house  its  tonnage  proportion  of  the 
payroll  expense  of  the  agent  and  his  main  office  force.  In  the 
chart  under  discussion  the  latter  method  is  employed.  It  will  be 
noted  that  the  cost  of  handhng  a  ton  of  freight  through  this  house 
varies  from  eighteen  to  twenty-three  cents.  It  is  highest  during 
the  winter  months  when  the  volume  of  traffic  and  the  efficiency 
of  labor  are  lowest. 

Chart  III  summarizes  the  facts  in  the  operation  of  a  yard 
where  freight  trains  are  classified.  [Curves  plotted  monthly  for 
Cars  Handled,  Wages,  Cost  of  Wages  per  Car-Handled,  Cars 
Handled  per  Engine-Hour.  Under  normal  conditions  this  chart 
would  show  danger  signals  to  any  executive  after  July,  1909. 
The  startling  payroll  advance  and  increase  in  labor  and  engine 
costs  per  car  were  due  to  extensive  alterations  in  the  terminal 
itself.]  The  cost  per  car  handled  varies  widely  in  different 
yards  on  account  of  the  differences  in  facihties  and  the  extent 
of  the  classification  made  necessary  by  the  character  of  traffic 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  659 

and  the  location  of  the  yard  with  respect  to  other  divisions, 
junctions,  and  connecting  roads.  The  usual  method  of  de- 
termining "  cars  handled  "  is  to  count  (i)  cars  into  the  yard  in 
trains,  (2)  cars  out  of  the  yard  in  trains,  (3)  cars  delivered  to  or 
received  from  connecting  roads,  and  (4)  cars  delivered  to  or 
received  from  industrial  side-tracks. 

Internal  movements  within  the  yard,  that  is,  switching  from 
one  yard  track  to  another,  are  disregarded,  because  in  the  first 
place  they  are  difficult  to  compute,  and  in  the  second  place  they 
would  swell  the  divisor  and  tend  to  reduce  the  average  cost  when 
extra  switching  is  done  which  might  be  avoided  by  superior  yard 
management.  The  yard-master  plans  to  classify  trains  with  tlie 
minimum  number  of  movements  of  engines  and  cars,  and  if 
internal  movements  were  included  in  figuring  the  cost  per  car 
there  would  be  no  incentive  to  reduce  them.  Consequently,  it  is 
not  always  fair  to  compare  the  showing  of  two  yards  unless  their 
operating  conditions  are  identical. 

The  value  of  the  statistics  lies  in  comparing  the  current  record 
of  each  yard  with  its  record  in  previous  months  or  previous  years. 
Each  yard  is  charted  separately,  but  for  the  information  of  the 
officials  one  chart  is  prepared  showing  the  results  comparatively 
for  all  yards. 

Every  official  has  his  own  way  of  supervising  train  service,  but 
there  are  three  fundamental  inquiries  always  in  mind:  (i)  is  the 
cost  of  wages,  fuel  and  repairs  justified  by  the  train  miles  and  the 
tonnage  moved;  (2)  is  the  capacity  of  locomotives  and  cars 
utilized;  and  (3)  is  the  service  expeditious  and  otherwise  satis- 
factory ?  No  system  of  statistics  will  take  the  place  of  personal 
supervision  on  the  road,  but  the  work  of  those  in  authority  is 
made  very  much  easier  when  they  are  furnished  with  complete 
and  current  data  which  reflects  the  degree  of  perfection  in  each 
of  these  three  fundamental  points. 

The  cost  of  wages  is  affected  by  the  method  of  assigning  the 
crews,  train  dispatching,  the  condition  of  the  locomotives,  and 
the  care  with  which  trains  are  loaded  to  their  tonnage  ratings. 
If  trains  are  dispatched  with  less  than  their  rated  tonnage  it 
results  in  more  trains  on  the  road  and  more  train  crews  under  pay. 


66o  BUSINESS  STATISTICS 

If  trains  are  overloaded,  they  are  slow  in  moving  over  the  division, 
and  the  overtime  paid  to  the  crews  usually  offsets  the  saving 
caused  by  a  reduction  in  the  number  of  trains.  Overloading  also 
affects  the  service  adversely  by  causing  delay  to  freight,  thus 
inviting  criticism  and  complaint. 

The  cost  of  fuel  per  engine-mile  is  influenced  by  the  design  and 
weight  of  the  engine,  the  price  and  quality  of  the  fuel,  the  weight 
of  the  train  and  its  speed  and  freedom  from  delay,  and  what  is 
most  important,  the  degree  of  competent  supervision  and  instruc- 
tion in  economical  methods  of  firing.  The  cost  of  engine  repairs 
is  affected  by  the  same  factors  and  also  by  the  adequacy  of  the 
facilities  for  repair  work,  particularly  in  engine  houses  where 
running  repairs  are  made  between  trips  and  until  the  engine  has 
reached  the  condition  which  calls  for  general  repairs  in  the  larger 
shops. 

A  daily  freight-train  report,  showing  each  train  separately,  is  a 
prerequisite  of  intelligent  supervision.  Without  it,  the  supervis- 
ing officials  work  at  an  extreme  disadvantage.  It  is  true  that 
many  roads,  perhaps  the  majority,  get  along  without  it,  but  it  is 
false  economy.  It  may  be  necessary  only  to  compile  the  complete 
data  for  trains  moving  over  the  ruling  grades,  or,  where  traffic  is 
unevenly  balanced,  it  will  serve  the  purpose  to  analyze  the 
movement  only  in  the  direction  of  the  heavy  traffic. 

Chart  IV  contains  a  mine  of  information,  showing,  as  it  does, 
the  interplay  of  so  many  factors.  [Curves  plotted  monthly  for 
Gross  Tonnage  per  Engine-Mile  —  Eastward,  Net  Tonnage  per 
Engine-Mile  —  Eastward  and  Westward,  Freight- Car- Miles  per 
Freight-Train-Mile,  Cost  of  Wages  per  Freight-Train-Mile, 
Cost  of  Wages  per  Freight-Car-Mile,  Average  Miles  per  Freight- 
Car  per  Day.  The  essential  freight-traffic  history  of  one  rail- 
road division  is  here  shown  for  three  full  years  in  such  form  that 
any  executive  can  compare  the  factors  entering  into  costs  and 
performances  of  any  two  months  or  years  of  that  period.]  The 
first  curve  shows  the  gross  tonnage  of  car  and  content  per  engine- 
mile  in  the  direction  of  heavy  traffic.  The  second  curve  shows 
the  net  tonnage  of  paying  freight  per  engine-mile  in  both  direc- 
tions.   The  net  tonnage  depends  somewhat  on  the  nature  of  the 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  66 1 

traffic.  When  coal  and  other  "  dead  "  freight  runs  heavy,  it  will 
increase  the  net  train  load;  on  the  other  hand,  if  it  decreases, 
or  if  merchandise  and  other  high-class  freight  increases  in  volume, 
it  will  tend  to  decrease  the  net  tonnage  per  train.  Another 
chart,  not  reproduced  here,  shows  the  division  of  the  tonnage, 
and  serves  to  interpret  other  related  charts.  Still  another  chart 
shows  the  average  lading  in  each  loaded  freight  car  and  the  per- 
centage of  empty-car  mileage. 

The  establishment  of  a  system  of  tonnage  ratings  and  the  daily 
statistical  exhibit  for  individual  freight  trains  is  said  to  have 
increased  the  gross  train  tonnage  on  this  road  from  800  to  iioo 
tons  in  the  direction  of  heavy  traffic,  and  decreased  the  number  of 
trains  30  per  cent.  The  reduction  in  train  mileage  is  estimated  to 
have  saved  about  $500,000  per  year. 

As  another  index  to  train-performance,  the  third  curve  on 
Chart  IV  shows  what  was  accomplished  in  freight  cars  hauled 
per  freight-train-mile.  The  fourth  and  fifth  curves  show  the 
wages  cost  per  train-mile  and  per  car-mile  and  reflect  the  increases 
in  the  wages  of  conductor  and  trainmen  in  April,  19 10.  The 
sixth  curve  is  an  indication  of  the  efficiency  of  equipment, 
"  average  miles  per  car  per  day." 

Chart  V  gives  important  information  relating  to  the  regularity 
of  service.  [Curves  plotted  monthly  for  Per  Cent  Passenger 
Trains  on  Time,  Average  Minutes  Late  at  Destination,  Over- 
time Paid  Passenger  and  Freight-Train  Crews,  Engine  Failures.] 
Its  principal  curves  are  those  showing  the  percentage  of  pas- 
senger trains  on  time  and  the  average  detention  of  delayed 
trains  at  destination.  The  statistics  are  compiled  from  the  daily 
delay  reports  and  includes  every  minute  of  train  detention.  The 
second  and  third  curves  apply  both  to  the  passenger  and  freight 
service,  and  are  introduced  to  show  the  sympathetic  relation 
between  engine  failures,  overtime  paid  train  crews,  and  passenger- 
train  detention.  Chart  VI  gives  an  analysis  of  the  causes  of 
passenger- engine  failures.  [Analysis  of  Passenger-Engine  Failures. 
Curves  plotted  monthly  for  number  due  to  Heating  of  Boxes  and 
Other  Bearings,  Steam  Failures,  Broken  Parts,  Leaking  Tubes  and 
Fire  Boxes;  also  for  Average  Miles  per  Engine-Failure,  Average 


662  BUSINESS  STATISTICS 

Passenger-Train  Detention  per  Passenger-Engine-Failure.  With 
graphic  records  Kke  this  for  all  his  divisions,  accurate  and  easy 
comparisons  of  the  efficiency  of  division  executives,  organizations 
and  train  crews  can  be  made  not  only  by  the  general  manage- 
ment but  by  the  men  responsible  for  the  records.] 

The  elements  in  the  cost  per  engine-mile  are  shown  in  Chart 
VII.  [Cost  of  Fuel,  Repairs,  etc.,  per  Engine-Mile.  Curves 
plotted  monthly  for  Supplies,  Fuel,  Repairs,  Engine-house  Ex- 
pense, and  Total.  The  seasonal  character  of  the  railroad  busi- 
ness is  clearly  shown  by  this  "graph"  covering  the  cost  of 
fuel,  repairs,  supplies  and  engine-house  expenses  per  engine-mile. 
This  is  only  one  of  a  score  of  detail  charts  analyzing  operating 
expenses.] 

It  is  impossible  in  any  one  article  to  cover  adequately  the  whole 
field  of  railway  operating  statistics.  The  few  specific  details 
which  have  been  given  are  suggestive  only  and  indicate  what 
some  of  the  railroads  are  doing.  On  other  phases  of  operation, 
similar  records  and  checks  are  established,  and  constant  progress 
is  being  made  in  enlarging  and  improving  upon  statistical 
methods. 

In  conclusion,  it  is  proper  to  state  that  all  the  railroads  of  the 
country  are  not  as  far  advanced  in  this  respect  as  the  few  roads 
whose  graphic  records  have  been  reproduced,  and  other  roads  of 
the  same  class.  In  fact,  there  is  a  wide  gap  between  the  methods 
of  those  conspicuously  in  advance  and  those  of  the  average  road. 
Much  remains  to  be  done  on  the  average  road  in  bringing  the 
officials  to  a  realization  of  the  need  of  a  comprehensive  system 
of  statistical  checks  as  an  aid  to  intelligent  administration. 
Statistics  in  themselves  will  accomplish  little,  but  when  carefully 
prepared,  intelligently  used,  and  supported  by  those  in  authority, 
they  are  found  indispensable  in  modern  railroading. 

What  the  railroads  need  is  the  establishment  of  a  committee 
or  bureau  as  a  part  of  the  American  Railway  Association  to  act 
as  a  clearing  house  for  ideas  and  to  set  up  statistical  standards. 
The  Association  had  such  a  committee  until  two  years  ago,  but 
it  made  little  progress,  although  early  in  its  existence  its  work 
bore  promise  of  fruitful  results. 


REPORTS  FOR  TEE  CHIEF  EXECUTIVE  663 

The  railroads  are  publicly  charged  with  having  very  meagre 
information  on  costs,  and  many  railroads  must  admit  that  the 
charge  is  true  in  its  application  to  their  properties.  It  is  not 
improbable  that  the  Interstate  Commerce  Commission  will  some 
time  undertake  to  bring  about  what  the  Committee  on  Statistical 
Inquiry  of  the  American  Railway  Association  failed  to  accom- 
plish, and  it  would  be  much  better  for  the  railroads  to  do  it  them- 
selves through  a  bureau  of  statistics  than  to  have  standards 
forced  upon  them  by  the  government.  By  establishing  their  own 
bureau  of  explosives  and  formulating  standard  rules  for  handling 
this  dangerous  class  of  freight,  they  made  it  unnecessary  for  the 
Commission  to  prepare  such  rules.  The  Commission  accepted 
the  railroad  standards  and  gave  them  the  force  of  law. 

Through  the  American  Railway  Association  the  standard  code 
of  train  rules  has  practically  standardized  train  operation.  The 
Association  has  also  promulgated  car  service,  per  diem,  and 
demurrage  rules  which  are  standard.  The  requirements  — 
physical  and  educational  —  of  applicants  for  employment  or 
promotion  in  train  service  have  been  standardized,  and  in  many 
other  respects  the  railroad  associations  have  brought  about  vmi- 
form  action  and  practice  in  many  operating  and  maintenance 
features.  But  they  have  not  undertaken  to  standardize  statistical 
methods  for  deriving  unit  costs. 

Constructive  action  of  this  nature  is  needed,  and  the  sooner 
such  a  bureau  is  established  and  does  for  statistical  methods 
what  the  standard  code  has  done  for  train  rules,  the  less  is  the 
probability  of  having  reform  come  from  the  outside. 

X.  Vitalized  Statistics  ^ 

By  James  Peabody 

Railroad  statistics  fall  naturally  under  two  principal  divisions: 
the  one  relating  to  traffic,  and  the  other  to  operation.  So  diverse 
are  these,  as  to  both  their  source  and  their  application,  that  they 
are  almost  wholly  unrelated  to  each  other.  The  more  complex, 
as  well  as  perhaps  the  more  important,  of  these  two  branches  is 

^  Ernest  R.  Dewsnup,  editor,  Railway  Organization  and  Working,  pp.  369-383. 
Reprinted  by  permission  of  University  of  Chicago  Press. 


664  BUSINESS  STATISTICS 

that  of  traffic,  although  hitherto  it  has  received  the  less  statistical 
attention.  We  have  spent  a  great  deal  of  time  and  money  in  the 
analysis  of  our  operating  expenses,  but  we  have  done  very  little 
of  that  work  in  connection  with  our  earnings.  To  be  successful, 
the  modern  merchant  must  know  exactly  what  he  is  making  or 
losing  on  each  class  of  merchandise  handled  by  him;  but  until 
recently  there  were  no  railroads  —  and  even  now  there  are  very 
few  —  that  have  any  accurate  idea  as  to  the  results  of  handling 
any  particular  traffic.  If  only  the  volume  of  earnings  during  the 
present  year  showed  an  increase  over  the  corresponding  period  of 
the  previous  year,  the  result  was  considered  as  reflecting  credit  on 
the  department  and  was  therefore  satisfactory.  In  former  days 
net  revenue  was  not  the  concern  of  the  Traffic  Department. 
Gross  earnings  was  the  shibboleth  of  the  traffic  official;  and  little 
wonder,  for  he  was  neither  charged  with  the  responsibility,  nor 
had  he  any  means  of  knowing  or  controlling  the  profitable  rela- 
tions of  receipts  and  expenditures.  It  is  only  within  the  past  two 
or  three  years  that  objection  was  made  by  the  railroads  to  the 
request  of  the  Interstate  Commerce  Commission  for  the  furnish- 
ing of  commodity  statistics,  on  the  ground  that  the  cost  of  pre- 
paring such  data  was  so  excessive  as  to  make  it  impracticable. 
This,  although  erroneous  so  far  as  any  necessary  expenditure  is 
concerned,  affords  perhaps  the  actual,  although  by  no  means  an 
adequate,  reason  why  this  important  branch  of  railroading  should 
have  been  so  long  neglected. 

The  more  progressive  of  our  railroad  managers  are  beginning 
to  see  the  error  of  this  view,  and  to  realize  that  information  which 
will  enable  the  Traffic  Department  to  earn  an  additional  dollar 
is  just  as  valuable  as  that  which  shows  the  Operating  Depart- 
ment how  to  save  one.  The  problem  is  how  this  can  best  be 
accomplished.  The  origin  of  traffic  is  so  widespread,  the  volume 
of  traffic  is  so  large,  and  the  conditions  of  traffic  are  so  diverse  as 
to  make  it  manifestly  impossible  for  any  general  statement  to  be 
made,  within  comprehensible  Hmits,  which  will  afford  the  direct- 
ing head  of  that  department  the  information  he  needs;  and  yet  it 
is  absolutely  essential  that  he  shall  have  at  hand,  or  within  easy 
reach,  whatever  it  may  be  necessary  for  him  to  know  respecting 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  665 

his  business.  While  it  is  the  grand  total  that  he  views  with  chief 
concern,  it  is  not  with  the  mass  that  he  deals.  What  may  be 
designated  the  units  of  traffic  are  the  things  which  command  his 
immediate  attention,  and  it  is  concerning  such  of  these  as  are  of 
present  moment  that  he  needs  to  be  advised.  The  problem, 
therefore,  is  not  so  much  that  of  accumulation  as  of  segregation; 
not  the  gathering  together  of  the  millions  of  transactions  which 
enter  into  the  handling  of  traffic,  but  the  keeping  of  them  apart, 
so  that,  when  called  for  in  any  form,  the  necessary  combination 
can  be  readily  made. 

Each  separate  shipment  on  a  railroad  is  carried  on  a  waybill, 
and  an  abstract  is  made  which  recites  the  essential  facts  of  these 
waybills,  embracing  the  total  of  the  daily  or  weekly  business  of 
every  station  on  both  the  forwarded  and  received  side.  On  the 
road  with  which  I  am  connected  these  abstracts  are,  by  the 
carbon  process,  made  in  duplicate,  and  a  copy  is  sent  by  every 
station  to  the  Statistical  Department,  thereby  giving  to  it  the 
record  of  all  traffic  movements.  In  this  department  is  prepared, 
from  these  abstracts,  what  is  known  as  a  "  monthly  commodity 
unit,"  which  represents  in  a  single  item  the  movement  of  every 
separate  commodity  between  any  two  stations  on  the  line,  show- 
ing origin,  destination,  weight,  ton-miles,  and  earnings.  The 
abstracts  are  then  filed  in  calendar  order  by  stations;  the  monthly 
units,  after  being  aggregated  in  certain  general  ways,  being  filed 
by  commodities.  We  thus  have  at  hand  in  statistical  form  not 
only  the  information  ordinarily  wanted,  but  are  prepared  to 
furnish  almost  immediately  upon  call  any  information  that  may 
be  desired. 

One  or  two  actual  illustrations  may  serve  to  make  this  plain. 
A  certain  large  firm  in  a  jobbing  town  in  the  West,  where  com- 
petition is  keen,  made  application  for  a  reduction  of  rates  from 
that  point  into  a  defined  local  territory  to  which,  from  that  point, 
the  existing  tariff  was  prohibitive,  and  which  was  therefore 
supplied  from  elsewhere.  The  compensation  offered,  in  event 
the  desired  rates  were  made,  was  to  give  to  the  road  from  which 
the  concession  was  asked  all  the  incoming  business,  which  was 
then  being  divided  among  several  roads.     The  problem  thus 


666  BUSINESS  STATISTICS 

presented  was:  Will  the  additional  revenue  to  be  derived  from 
the  incoming  traffic  which  the  road  will  then  get  more  than  offset 
the  loss  caused  by  the  reduction  in  revenue  on  the  traffic  it  is  now 
getting  ?  This  involved  the  consideration  of  a  large  volume  of 
traffic,  moving  from  many  points,  at  higher  rates  than  would 
apply  if  the  demand  were  supplied  from  the  new  point  of  distribu- 
tion. The  Statistical  Department  was  called  upon,  and,  having 
at  hand  the  information,  easily  prepared  a  statement  which 
effectually  disposed  of  the  proposition,  it  being  shown  that  the 
effect  would  be  not  only  to  reduce  the  revenues  of  the  railroad, 
but  also  to  increase  the  cost  to  the  consumer. 

In  another  case  a  stock-raiser  wished  to  make  a  large  immediate 
movement  of  a  certain  commodity,  which,  because  of  the  long- 
and  short-haul  clause  of  the  law,  would  interfere  with  existing 
rates  on  the  same  commodity  to  intermediate  points.  It  was 
necessary  to  know  at  once  to  what  extent  revenues  would  be 
affected,  if  the  required  rate  were  made.  The  Statistical  Depart- 
ment, through  its  unit  system,  was  able  to  give  the  information 
in  three  hours  which,  under  the  ordinary  method  of  obtaining 
such  data,  would  have  required  three  weeks,  with  the  result  that  a 
profitable  business,  which  would  otherwise  have  been  lost,  was 
secured. 

Again,  arrangements  are  being  constantly  made  by  the  Traffic 
Department  covering  large  movements  of  freight;  but  it  fre- 
quently happens  that  shippers  for  various  reasons  divert  their 
shipments  before  the  specified  amount  has  moved.  It  is  the 
business  of  the  Statistical  Department  to  keep  watch  of  such 
traffic,  which  is  easily  done  through  the  medium  of  the  monthly 
units  of  the  commodity  movements.  It  is  also  frequently  neces- 
sary for  the  Traffic  Department  to  know  the  extent  of  the  business 
of  particular  shippers;  this  the  Statistical  Department  furnishes 
on  short  notice,  through  the  use  of  the  abstracts  which  are  so 
filed  as  to  have  the  record  all  together.  The  number  of  these 
calls  are  so  great,  and  their  nature  so  diverse,  as  to  render  impos- 
sible any  compilation  in  advance  which  will  serve  the  purpose; 
but  it  is  found  that,  through  the  medium  of  the  commodity  units 
on  the  one  hand,  and  the  segregated  abstracts  on  the  other, 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  667 

almost  any  question  regarding  the  movement  of  traffic  is  easily 
and  quickly  answered. 

It  is  also  valuable  to  know  just  what  each  dilBferent  class  of 
traffic  earns.  There  is  widespread  ignorance  in  this  regard,  and 
no  little  injustice  has  been  done  to  railroads  because  of  it.  In  the 
early  days  of  railroading  some  man  conceived  the  idea  of  working 
out  the  average  earnings  per  ton-mile  —  a  factor  not  only  useless 
as  conveying  any  information,  but  absolutely  harmful  because 
of  the  wrong  impression  thereby  created.  During  the  past  twenty 
years,  which  embraces  the  period  of  governmental  railroad  regu- 
lation, this  average  ton-mile  rate  has  done  yeoman  service  in  the 
reduction  of  railway  charges.  No  less  an  authority  than  the 
Interstate  Commerce  Commission  employed  it  in  an  opinion 
wherein  a  rate  prescribed  by  it  was  held  to  be  certainly  justified, 
for  the  reason  that  it  was  more  than  double  that  of  the  average 
rate  per  ton-mile  received  by  the  same  road  as  shown  in  its  annual 
report,  although,  as  a  matter  of  fact,  it  was,  from  any  trans- 
portation standpoint,  altogether  below  the  standard  of  reason- 
able compensation.  While,  therefore,  the  statement  of  average 
earnings  per  ton-mile  may  be  positively  declared  to  be  not  only 
useless,  but  harmful,  a  report  of  the  actual  earnings  per  ton-mile 
on  each  separate  commodity  is  a  positive  benefit.  This,  when 
taken  in  connection  with  the  average  distance  each  commodity 
is  hauled,  the  average  loading  of  each  commodity  per  car,  and  the 
total  ton-miles  of  each  commodity  moved,  furnishes  the  traffic 
man  with  a  comprehensive  basis  on  which  to  formulate  his  plans 
for  securing  traffic. 

It  will  be  observed  that  no  mention  has  been  made  of  passenger 
traffic.  As  already  stated,  we  are  using  statistics  not  so  much  as 
a  record  of  past  events  as  an  indication  of  future  possibilities.  So 
far  as  I  have  been  able  to  determine,  the  results  of  past  passenger 
traffic  furnish  no  prophecy  of  future  business.  That  is  to  say, 
there  is  nothing  which  we  can  get  out  of  the  business  already 
carried  which  will  tell  us  how  to  get  a  single  additional  passenger 
in  the  future.  We  are  required  by  law  to  furnish  certain  informa- 
tion to  both  the  state  and  the  national  authorities  concerning  the 
movement  of  passengers,  and  our  figures  in  this  connection  go  far 


668  BUSINESS  STATISTICS 

enough  only  to  meet  this  requirement.  Occasionally  information 
is  desired  by  our  officials  regarding  a  certain  movement;  but 
that  is  easily  furnished  from  the  data  we  keep  for  the  purposes 
already  referred  to,  and  requires  no  special  treatment. 

Operating  statistics  deal  with  an  entirely  different  proposition; 
they  relate  to  expenditure  and  performance.  The  problem  which 
confronts  that  department  of  railroad  is  to  handle  the  business 
with  the  greatest  practicable  facility  at  the  lowest  possible  cost 
consistent  with  economical  results.  This  is  a  very  different 
proposition  from  that  which  confronts  the  Traffic  Department. 
There  transportation  is  dealt  with  on  the  basis  of  its  entire  move- 
ment from  origin  to  destination.  Here  consideration  is  taken  of 
each  separate  movement  en  route.  Also,  the  Traffic  Department 
is  concerned  only  with  such  tonnage  as  produces  revenue,  while 
the  Operating  Department  must  take  account  of  all  the  tonnage 
moved,  which  includes  not  only  revenue  freight,  but  what  is 
known  as  company  freight,  together  with  the  weight  of  the  cars 
in  which  the  commodities  are  transported. 

To  illustrate:  On  a  dozen  shipments  from  Chicago  to  San 
Francisco  the  Traffic  Department  takes  account  of  the  rate-pay- 
ing qualifications  of  each  of  the  articles  transported  and  deals 
with  them,  separately  as  to  each  commodity,  but,  for  the  entire 
distance,  as  a  single  item.  This  is  because  of  the  different  rates 
charged  on  the  various  commodities.  The  Operating  Depart- 
ment, however,  consolidates  all  of  these  shipments  into  a  single 
item  and  reduces  them,  together  with  the  cars  in  which  they  are 
carried,  to  one  common  factor.  It  then  takes  account  by  record 
of  each  movement;  and  there  are  as  many  items  to  be  considered 
as  there  are  engines  hauling  the  freight,  conductors  in  charge  of  it, 
operating  divisions  of  the  road  over  which  it  passes,  and  sub- 
divisions into  districts  of  main  line  and  branches.  It  is  readily 
apparent,  therefore,  that  two  entirely  different  theories  of 
statistics  must  obtain  in  the  treatment  of  problems  which  are  so 
diverse.  And  just  here  is  the  explanation  why  railroad  statistics, 
as  ordinarily  compiled,  are  wholly  inadequate  for  any  purpose. 
It  is  manifestly  impossible  to  make  the  data  necessary  for  the 
intelligent  comprehension  of  the  operation  of  either  one  depart- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  669 

ment  apply  to  the  other;  for,  so  far  as  the  character  of  the  infor- 
mation required  is  concerned,  there  is  little  in  common. 

It  may  be  well  here  to  point  out  a  serious,  as  well  as  a  very 
costly,  error  which  has  crept  into  railroading  because  of  the  misuse 
of  inadequate  statistics.  Those  of  us  who  have  been  connected 
with,  or  have  studied,  railroad  operation  have  heard  of  late  years 
a  good  deal  of  the  "  operating  ratio,"  which  means  the  proportion 
of  the  total  receipts  of  the  road  paid  out  for  what  are  known  as 
operating  expenses.  Men  have  been  employed  at  high  salaries 
to  take  charge  of  operations,  because  the  statistics  of  the  road  on 
which  they  were  previously  engaged  showed  a  small  operating 
ratio.  No  more  misleading,  as  well  as  unfortunate,  idea  was  ever 
conceived  than  that  the  operating  ratio  expresses  the  measure  of 
transporting  efficiency.  The  final  test  of  all  railroad  operation  is 
the  balance  sheet,  and  it  is  very  possible  for  a  railroad  with  an 
operating  ratio  of  75  per  cent,  which  is  not  considered  commend- 
able, to  show  a  larger  balance  than  would  have  been  the  case  had 
its  operating  ratio  been  reduced  to  60  per  cent,  which  is  thought 
creditable;  although,  in  the  first  instance.  Wall  Street  would 
stand  aghast,  and,  in  the  second,  owners  of  other  properties 
would  indulge  in  a  race  to  see  which  could  secure  the  services  of 
the  man  who  had  succeeded  in  reducing  his  ratio  to  such  a 
supposedly  favorable  basis. 

To  measure  the  capacity  of  a  transportation  official  by  the  oper- 
ating ratio  can  easily  be  shown  to  be  both  illogical  and  unfair. 
One  of  the  principal  factors  in  the  determination  of  this  ratio  is 
gross  earnings  —  something  with  which  the  man  in  charge  of 
operation  nowadays  has  nothing  whatever  to  do.  Another 
important  factor  is  made  up  of  what  is  known  as  operating  ex- 
penses, one  of  the  main  items  of  which  is  maintenance  of  way.  The 
amount  to  be  expended  on  this  account  each  year  is  determined, 
not  by  the  transportation  official — although  he  is  consulted — 
but  by  the  Board  of  Directors,  or  at  least  by  the  Executive 
Committee,  and  the  official  is  expected  to  use  the  designated 
amount  to  the  best  advantage.  Still  another  important  item  is 
maintenance  of  equipment,  and  here  too  the  amount  is  largely 
determined  in  the  same  way;  for  maintenance  includes  not  only 


670  BUSINESS  STATISTICS 

repairs,  but  also  renewals.  The  general  expenses  —  under  which 
term  are  included  the  salaries  of  the  general  officers  together  with 
their  office  expenses,  and  also  insurance  and  the  law  —  are  also 
matters  wholly  beyond  the  purview  of  the  transportation  official. 
Thus  we  have  left  only  those  expenditures  which  come  under  the 
head  of  conducting  transportation,  over  which  he  has  immediate 
control;  and  of  these  a  very  large  proportion  are  beyond  his  ken. 
Such  items  as  superintendence  of  traffic,  advertising,  outside 
agencies,  commissions,  and  to  some  extent  car  mileage  and  loss 
and  damage,  amounting  perhaps  to  from  10  to  15  per  cent  of  the 
total  outlay  under  this  head,  are  not  within  his  province.  It  is 
perfectly  plain,  therefore,  that  to  make  the  operating  ratio 
the  measure  of  an  official's  capacity  is  doing  him  an  injustice 
on  the  one  hand,  or  giving  him  undue  credit  on  the  other.  As 
constituting  a  standard,  it  is  altogether  valueless. 

Not  only  is  this  the  case,  but  it  operates  to  injure  railroad 
revenues.  Any  man  worth  having  on  a  railroad  is  striving  all  the 
while  to  improve  his  position,  and  he  will  naturally  shape  his 
conduct  to  meet  the  requirements  of  promotion.  So  long  as  the 
operating  ratio  is  the  standard,  regard  for  his  advancement 
demands  that  every  engine  when  moved  shall  always  be  loaded 
to  its  full  capacity,  and  that  such  capacity  shall  consist,  as  far  as 
possible,  of  loaded  cars.  Traffic,  on  the  other  hand,  frequently 
requires  rapid  handling,  and  very  often  large  movement,  of  empty 
cars  at  short  notice,  in  order  that  business  which  would  otherwise 
be  lost  may  be  secured.  It  is  easy  to  see  that  just  here  is  pro- 
jected a  conffict.  Lightly  loaded  trains  and  fast  movement,  or 
the  hauling  of  empty  cars  under  quick  orders  and  for  long  dis- 
tances, means  an  increased  operating  ratio;  and  although  the 
result  of  such  movement  may  serve  to  increase  the  net  balance  at 
the  end  of  the  year,  the  man's  reputation  suffers.  The  trouble  is 
that  the  revenue  which  is  lost  because  of  failure  to  perform  a 
service  which  unfavorably  affects  the  operating  ratio  does  not  in 
any  way  appear  in  the  accounts.  If  such  lost  revenue  could  be 
charged  up  as  an  item  of  expense,  there  would  be  a  very  great 
change  in  the  method  of  operation  on  many  roads.  This  is  one  of 
the  problems  which  it  is  the  duty  of  the  Statistical  Department 
to  solve. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  67 1 

For  many  years  there  have  been  divergent  views  as  to  the  best 
unit  to  employ  in  this  department  for  purposes  of  comparison. 
The  commercial  ton-mile,  which  includes  only  revenue  freight; 
the  net  ton-mile,  which  embraces  all  freight  both  commercial  and 
company;  the  gross  ton-mile,  which  includes  the  weight  of  both 
the  car  and  contents;  the  car-mile,  which  considers  each  indi- 
vidual car  as  a  unit;  and  the  train-mile,  which  treats  as  a  single 
item  the  entire  number  of  cars  in  each  train,  have  all  had  their 
advocates.  While  it  is  conceded  that  no  one  of  them  constitutes 
a  perfect  unit,  it  is  now  generally  admitted  that  the  gross  ton-mile 
forms  the  nearest  approach  to  it. 

Selecting,  then,  the  gross  ton-mile  as  the  unit  of  work  performed, 
it  is  necessary  to  provide  a  correlative  unit  as  the  measure  of  the 
performance  of  the  work.  Here,  again,  variant  views  are  held, 
and  we  have  the  engine-mile,  which  is  the  unit  of  miles  run  per 
locomotive;  the  tractive  force,  which  expresses  the  theoretical 
hauling  power  of  the  locomotive;  and  the  traction  ton-mile, 
which  is  the  weight  on  the  locomotive  drivers  multiplied  by  the 
miles  run.  The  first,  because  of  the  varying  size  of  the  locomo- 
tives, is  manifestly  incompetent;  the  second,  because  of  the 
extreme  divergence  of  views  as  to  the  factors  to  be  considered 
in  its  determination,  is  of  little  value;  leaving  the  third,  which, 
although  indefinite  as  to  the  amount,  is,  nevertheless,  absolutely 
comparative  as  to  performance,  and  therefote  the  best  unit  thus 
far  ascertained.  Using  these  two  units  —  to  wit,  the  gross  ton- 
mile  as  the  measure  of  the  work  performed  and  the  traction 
ton-mile  as  the  measure  of  the  force  performing  it  —  we  have  the 
ratio  of  both  efficiency  and  economy.  If  we  can  increase  our 
gross  ton-miles  per  traction  ton-mile,  we  are  adding  to  our 
efficiency;  if  we  can  do  it  at  less  cost,  we  are  progressing  in 
economy. 

The  most  convenient  means  for  obtaining  the  record  of  gross 
ton-miles  is  from  what  is  technically  known  as  the  "  conductor's 
wheel  report."  This  furnishes  all  the  necessary  data  required  for 
keeping  account  of  car  movement,  train  movement,  gross  ton 
movement,  and  net  ton  movement,  all  of  which  enter  into  the 
statistical  result.    In  connection  with  these  movements  are  kept 


672  BUSINESS  STATISTICS 

the  records  of  wages  of  the  train  crew,  amount  of  fuel  consumed, 
and  other  items  entering  into  the  train  expenses;  so  that  it  is  easy 
to  determine  the  work  performed  by  each  unit  of  power,  and  the 
relative  direct  cost  of  doing  it.  Into  this  computation  also  come 
the  repairs  of  each  locomotive,  making  it  possible  to  determine  in 
a  general  way  the  type  of  engine  best  fitted  for  a  given  service. 
In  order  to  encourage  fuel  economy  in  the  running  of  locomotives, 
an  individual  record  is  kept  of  the  gross  ton-miles  hauled  per  ton 
of  coal  used  by  each  engineer,  this  being  posted  at  the  end  of  each 
month  for  comparison  and  inspection. 

In  addition  to  the  methods  already  enumerated,  all  expendi- 
tures on  account  of  operation  are  summarized  under  four  general 
heads,  namely:  maintenance  of  way,  maintenance  of  equipment, 
conducting  transportation,  and  general  expenses;  which  are  in 
turn  analyzed  and  subdivided  under  fifty-three  designations. 
This  distribution  is  first  made  as  to  location  —  that  is  to  say,  the 
particular  part  of  the  line  upon  which  each  expenditure  is  made. 
Those  outlays  which,  by  reason  of  their  general  character  —  such 
as  superintendence,  repairs  of  equipment,  etc.  —  cannot  be 
definitely  assigned  as  to  location,  are  apportioned  on  the  basis  of 
car-mileage  or  locomotive-mileage  on  each  portion  of  the  road,  as 
may  be  most  appropriate.  This  distribution  is  made,  not  only 
by  divisions  of  the  road,  but  by  main  line  and  branches,  so  that 
each  portion  of  the  road  bears  its  own  proper  burden.  Having 
thus  ascertained  the  amounts  chargeable  against  each  portion 
of  the  road,  they  are  again  subdivided  as  between  freight  and 
passenger  service  on  a  basis  of  train-mileage.  Against  this  final 
subdivision  is  put  the  number  of  engine-miles,  car-miles,  ton- 
miles  both  gross  and  net,  and  train-miles,  permitting  us  to  com- 
pare, in  each  particular,  the  work  of  one  month  with  that  of 
another  on  each  division  of  the  road,  as  well  as  on  the  entire 
system.  By  this  means  is  shown  the  average  cost  of  operation 
on  each  separate  portion  of  the  road. 

It  will  be  readily  understood  that,  having  on  the  one  hand  the 
average  cost  of  transportation  by  divisions,  and  on  the  other  the 
actual  revenue  earned  by  commodities,  we  are  able  to  determine, 
not  what  it  costs  us  to  haul  each  separate  commodity,  but 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  673 

whether  we  are  receiving,  on  any  particular  commodity,  the 
average  cost  of  transportation  over  the  particular  portion  of  the 
road  on  which  it  moves.  I  think  it  will  not  be  disputed  that  any 
equitable  adjustment  of  transportation  charges  should  assign  to 
each  principal  article  of  commerce  a  rate  which  will  at  least  pay 
the  average  cost  of  transportation;  otherwise  some  commodity 
is  compelled  to  bear  a  burden  which  properly  belongs  to  another. 
The  value  of  statistics  of  this  character  was  recently  demon- 
strated in  what  is  known  as  the  Texas  Cattle-Raisers'  Case,  in 
which  complaint  was  made  to  the  Interstate  Commerce  Com- 
mission that  the  rates  on  cattle  from  Texas  to  the  markets  were 
too  high.  To  disprove  this  statement,  the  movement  of  a  car  of 
cattle  was  followed  from  representative  points  in  each  of  forty- 
two  rate  groups  in  Texas  and  Indian  Territory,  both  to  Kansas 
City  and  to  Chicago.  The  average  cost  of  movement  over  each 
separate  division  traveled  was  computed  on  the  gross  ton-mile 
basis,  and  it  was  found  that  the  actual  revenue  received  for 
such  haul  averaged  nearly  $8  per  car  less  than  the  average  cost 
to  Kansas  City,  and  $19.52  per  car  less  than  the  average  cost  to 
Chicago.  It  was  thus  conclusively  shown,  not  only  that  the  rates 
were  not  too  high,  but  that  they  were  still  too  low,  and  that  the 
recent  advance  of  which  complaint  was  made  was  more  than 
justified. 

XI.  Statistical  Units  Used  in  Analysis  of  Electric 
Railway  Accounts  ^ 

By  James  A.  Emery 

In  preface  I  wish  to  make  a  plea  that  operating  men  give  more 
attention  to  the  forms  of  accounts.  The  president  and  directors 
of  a  company  are  concerned  with  the  summarized  figures  of  the 
income  account  but  the  details  of  revenue  and  expenses  are  pre- 
pared for  the  information  of  the  manager.  He  should  therefore 
prescribe  that  they  give  him  what  he  needs  to  know.  Here,  from 
the  manager's  standpoint,  lies  a  failing  of  our  accounting  system 
—  that  our  classification  is  based  on  the  character  of  the  expendi- 

*  Proceedings  of  the  American  Electric  Railway  Accountants^  Association,  1913, 
pp.  1 5  2- 1 61.    Reprinted  by  permission  of  American  Electric  Railway  Association. 


674  BUSINESS  STATISTICS 

ture  rather  than  the  object  for  which  the  expenditure  is  made.  It 
seems  the  height  of  absurdity,  for  example,  in  the  electric  light 
and  power  business,  to  draw  careful  distinctions  between  the 
elements  of  demand  and  output  in  making  rates  and  then  to  pay 
absolutely  no  attention  to  this  distinction  in  the  records  of  cost 
of  service.  To  determine  or  check  the  important  figures  upon 
which  the  charges  to  customers  are  based,  it  is  necessary  to  go 
through  a  painful  process  of  analyzing  expense  and  construction 
accounts.  There  is  no  reason  why  central  station  expense 
accounts  should  not  be  kept  in  such  a  way  that  we  may  know 
every  month  the  cost  of  maintaining  a  kilowatt-capacity  in 
readiness  to  serve,  of  the  additional  cost  of  generating  and  dis- 
tributing one  kilowatt-hour,  and  of  the  cost  per  customer  of 
those  operating  expenses,  which  vary  directly  as  the  number  of 
customers. 

In  street  railway  accounts,  likewise,  there  is  much  opportunity 
for  improvement.  We  spend  millions  of  dollars  per  year  for 
special  work  and  yet  few  managers  can  tell  how  much  it  costs 
them,  as  the  labor  cost  is  not  segregated.  Our  standard  system 
of  accounts  does  not  provide  means  of  ascertaining  the  costs  of 
the  important  items  of  painting  cars  or  of  repairs  to  trucks  or  of 
repairs  to  air  brake  equipment.  In  setting  up  depreciation  or 
renewal  reserve  accounts  we  do  not  specify  and  allow  for  parts  to 
be  replaced  under  maintenance.  We  lump  in  one  account  all 
payments  for  damages  and  have  no  way  of  telling  directly  how 
much  is  paid  to  passengers  and  how  much  to  the  general  public 
or  employees;  how  much  is  paid  in  settlements  and  how  much  in 
judgments. 

These  observations  are  not  made  in  criticism  of  our  accountants 
who  have  done  so  much  to  systematize  our  business  records  and 
who  have  been  pioneers  in  analysis,  classification  and  standardiza- 
tion. It  is  the  manager  who  should  now  step  forward  and  tell  the 
accountant  what  he  uses  the  information  for,  how  he  uses  it,  and 
in  what  forms  he  needs  it.  This  brings  us  to  the  question  which 
has  been  discussed  before:    What  is  the  purpose  of  accounts  ? 

We  keep  accoxmts  to  make  sure  that  we  do  not  lose  or  waste 
money.    We  reduce  accounts  to  a  unit  basis  to  determine  effi- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  675 

ciency.  A  certain  amount  per  unit  of  product  or  service  is  received 
and  we  endeavor  to  earn  this  amount  as  cheaply  as  possible, 
consistent  with  producing  a  satisfactory  product  or  service.  We 
therefore  analyze,  classify  and  examine  our  various  expense  items 
to  determine  where  we  may  cheapen  any  of  them  per  unit  of 
finished  product.  The  ultimate  aim  is  to  reduce  the  ratio  of  cost 
to  receipts,  and  in  working  to  this  end  we  try  to  produce  in  our 
accounts  microscopic  details,  as  clear  and  undistorted  as  possible. 
We  then  try  to  establish  and  work  to  standards  based  on  what 
has  been  done  on  other  properties  and  in  other  years. 

The  ratio  of  cost  to  receipts  is  misleading  when  used  for  com- 
parison in  city  transportation  because,  unfortunately,  the 
revenue  is  not  proportioned  to  the  service  rendered.  If  we 
eliminate  the  factor  of  rate  of  fare  and  calculate  costs  per  pas- 
senger, we  can  deduce  standards  based  upon  differing  lengths  of 
haul,  density  of  traffic  and  load  factor,  but  service  required  and 
rendered  is  not  even  proportional  to  the  nimiber  of  passengers 
thus  quaHfied.    A  street  railway  must  provide:  — 

1.  During  the  rush  hours,  a  number  of  passenger  space-miles 
(seats  and  standing  spaces). 

2.  During  the  between-rush  hours,  a  number  of  seat-miles; 
or  on  smaller  properties,  car-miles. 

3.  During  the  night  and  early  morning  hours,  a  number  of  car- 
miles  to  maintain  reasonable  headways,  with  little  regard  to  the 
volume  of  traffic. 

Therefore,  a  system  would  show  high  efficiency  of  design  and 
operation  when  the  cost  per  space-mile  during  the  rush  hours  and 
when  the  cost  per  seat-mile  during  the  between-rush  hours  is  low, 
and  when  the  cost  per  car-mile  during  the  night  and  early  morn- 
ing is  low.  It  is  manifestly  out  of  the  question  to  apportion  costs 
on  the  above  basis  and  our  problem  is  to  determine  the  practi- 
cable basis  which  comes  closest  to  it.  That  is,  we  would  like  to 
find  a  unit  which  when  divided  into  our  costs  will  tell  us,  without 
substantial  quahfication,  if  the  operation  of  a  property  is  efficient 
and  if  the  engineering  design  and  construction  are  good. 

The  various  units  commonly  considered,  in  the  order  of  their 
relation  to  each  other,  are:  — 


676  BUSINESS  STATISTICS 

1.  Dollars  (per  cent)  of  gross  earnings. 

2.  Revenue-passengers.  Equalling  gross  earnings  divided  by 
the  average  rate  of  fare. 

3.  Passenger-miles.  Derived  from  the  number  of  passengers 
multiplied  by  the  average  haul. 

4.  Seat-miles  or  space-miles.  Proportioned  to  the  passenger- 
mileage  and  also  dependent  upon  the  density  of  traffic. 

5.  Car-miles.  Equalling  the  seat-miles  or  space-miles  divided 
by  the  seats  or  spaces  per  car. 

6.  Ton-miles.  Equalling  the  car-miles,  multiphed  by  the 
average  weight  per  car  or  the  seat-miles  multiplied  by  the  average 
weight  per  seat. 

7.  Car-hours.  Equalhng  the  car-miles  divided  by  the  average 
speed. 

8.  Normal-maximum-cars  in  operation.  Derived  from  the 
car-hours  and  the  service  factor. 

9.  Car-trips.     (Round  trips.) 

Let  us  consider  in  order  the  relative  merits  and  disadvantages 
of  these  units:  — 

1.  Dollars  of  gross  earnings.  As  the  money  which  comes  in 
measures  the  absolute  limit  of  the  total  outgo,  it  is  very  important 
that  we  should  know  in  simplest  terms  what  proportion  of  it  goes 
to  each  item  of  expenditure.  Percentage  of  gross  earnings  should 
therefore  be  used,  whatever  units  of  service  are  chosen.  In  com- 
paring one  property  with  another  on  this  basis,  however,  care 
should  be  taken  to  see  that  the  average  rate  of  fare,  average  haul, 
density  of  traffic  per  mile  of  track  and  load  factor  are  not  widely 
different. 

2.  Revenue-passenger.  The  use  of  this  unit  would  eliminate  the 
variance  due  to  difference  in  rates  of  fare,  and  the  cost  at  which  a 
company  carries  a  passenger  is  in  general  a  fair  measure  of  the 
efficiency  of  design  and  operation,  if  values  or  factors  for  the 
principal  fixed  conditions  of  average  haul,  density  and  load  factor 
are  known. 

3.  Passenger-mile.  Presentation  of  the  cost  of  transporting  one 
passenger  one  mile  would  eliminate  discrepancies  in  average 
length  of  haul.    It  is  not  practicable,  however,  on  a  city  system 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  Gy/ 

to  calculate  passenger-mileage  regularly  and  it  must  be  re- 
membered that  service  cannot  be  proportioned  exactly  to  the 
passenger-mileage. 

4.  Seat-mile  or  space-mile.  In  stepping  from  the  passenger- 
mile  to  the  seat-mile  or  space-mile,  we  introduce  the  first  factor 
dependent  upon  operating  efficiency.  A  manager,  by  lack  of 
attention  to  schedules  or  traffic,  may  operate  more  seat-miles 
than  are  necessary.  His  maintenance  of  track  and  line  and 
general  expenses  which  do  not  vary  directly  with  the  seat-mileage 
will  therefore  figure  lower  per  seat-mile  and  his  operation  on  the 
seat-mileage  basis  would  actually  appear  efficient  when  it  may  be 
poor.  If,  however,  we  can  establish  standards  of  proportions  of 
seat-miles  to  passenger-miles  for  various  traffic  densities  and  load 
factors,  a  statement  of  such  proportion,  together  with  the  cost  of 
service  per  seat-mile  for  a  given  system,  would  furnish  a  practi- 
cally complete  basis  for  judgment  of  its  efficiency  of  design  and 
operation.  The  use  of  the  space-mile  is  hardly  worth  consider- 
ing, for,  while  it  ought  to  be  understood  that  standing  space  must 
enter  into  rush-hour  calculations,  its  general  use  would  be  popu- 
larly offensive.  Space-mileage  is  a  measure  of  service  for  not  over 
25  per  cent  of  the  traffic  of  the  day  and  the  spaces  per  car  vary  in 
a  considerable  degree  as  the  number  of  seats. 

5.  Car-mile.  Our  friend  of  long  standing,  the  car-mile,  is 
implanted  in  our  imagination  and  habits  of  thought  and  to  give 
it  up  would  involve  something  of  the  readjustment  which  would 
attend  the  adoption  of  the  metric  system  in  general  business. 
Car-mile  figures  are  generally  in  convenient  denominations  and 
the  unit  is  the  most  appropriate  for  many  equipment  records. 
Compared  with  other  units  under  consideration,  the  car-mile  has 
the  same  merits  as  the  seat-mile,  but  at  the  present  tune  labors 
under  the  serious  objection  that  there  is  such  great  variation  in 
the  capacity  of  cars.  Although  the  average  car  is  approaching  a 
standard  of  from  forty  to  fifty  seats,  there  is  always  likely  to  be 
considerable  variation.  The  car-mile  is  a  measure  of  about  25  per 
cent  of  the  service  provided  by  a  street  railway.  Car-mileage  can 
be  calculated  easily  and  accurately  and  it  has  the  advantage  of 
long  use  and  familiarity.  As  will  be  seen  later,  differences  in  size  of 


678  BUSINESS  STATISTICS 

cars  and  speed  may  not  produce  great  variance  in  total  operating 
expenses  per  car-mile. 

6.  Ton-mile.  The  ton-mile  has  some  merit  as  a  unit  for  judg- 
ing efficiency  of  operation.  A  considerable  portion  of  the  operat- 
ing expenses  varies  directly  as  the  weight  moved,  but  our  unit 
should  show  efficiency  of  design  as  well  as  operation  and  the  ton- 
mile  sidetracks  one  of  the  most  important  features  of  design. 
For  example,  if  for  a  given  property  the  operating  expenses  per 
ton-mile  be  low,  it  would  appear  that  the  operation  is  efficient. 
This  might  not  be  the  case  —  for,  if  unnecessary  weight  were  put 
into  the  cars  through  poor  design,  the  ton-mileage  would  be 
abnormally  high  and  the  operating  expenses  per  ton-mile  abnor- 
mally low.  Ton-mileage  is  more  difficult  to  calculate  than  seat- 
mileage,  on  account  of  the  live  load. 

7.  Car-hour.  When  used  side  by  side  with  the  car-mile,  the  car- 
hour  indicates  only  the  effect  of  speed.  It  has  some  advantage 
over  the  car-mile  in  comparing  revenue  statistics,  for  it  shows 
clearly  the  advantage  in  higher  speeds  and  furnishes  a  more 
accurate,  quick  basis  of  comparison  of  the  net  earnings  of  various 
routes  than  does  the  car-mile.  For  use  iu  analyzing  the  details  of 
operatiQg  costs,  however,  it  is  not  so  accurate  a  gauge  of  efficiency 
as  the  car-mile.  As  operating  expenses  per  car-hour  are  constant 
multiples  of  operating  expenses  per  car-mile,  it  seems  wasteful 
to  use  them  side  by  side  for  details.  Like  the  car-mileage,  the  car- 
hourage  can  be  calculated  easily  and  accurately.  It  is  not, 
however,  a  direct  measure  of  any  part  of  the  service. 

The  relation  of  the  element  of  speed  to  revenue  and  expenses 
is  intricate.  It  is  certainly  cheaper  to  haul  a  given  number  of 
passengers  between  two  points  at  high  speed  than  at  low  speed. 
It,  therefore,  would  seem  that  at  a  less  cost  we  can  furnish  what 
passengers  prefer  and  would  even  pay  more  money  for.  Why 
then  are  our  rates  on  suburban  or  high-speed  lines  at  least  as  high 
as  on  city  lines  ?  The  answer  is  found  in  the  element  of  density 
of  traffic.  We  can  move  100,000  passengers  over  a  given  piece 
of  track  very  much  cheaper  per  passenger  than  we  can  move 
10,000.  This  balancing  of  factors  explains  the  remarkable  uni- 
formity of  operating  expenses  per  car-mile  on  systems  widely 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  679 

different  in  size  and  character.  It  also  brings  to  mind  the  fact 
that  differences  in  size  of  cars  may  not  make  great  differences  in 
the  cost  of  operation  per  car-mile  for  handling  the  same  volume 
of  traffic;  for,  while  most  items  of  operating  expenses  are  greater 
per  car-mile  for  larger  cars,  the  item  of  platform  wages,  with 
some  others,  totalling  about  50  per  cent  of  the  operating  expenses, 
is  proportionately  smaller. 

Speed  is  governed  by  all  three  elements  which  control  the 
destiny  of  a  street  railway.  It  is  in  part  fixed  by  physical  and 
legal  conditions  over  which  neither  construction  engineer  nor 
operating  manager  has  control.  It  is  dependent  on  the  design 
of  track,  rolling  stock,  power  plant  and  distribution  system.  An 
effort  to  obtain  higher  speed  in  the  design  would  have  saved 
many  properties  from  bankruptcy  and  the  neglect  or  failure  to 
design  for  the  highest  speed  practicable  has  crippled  many  others. 
The  average  number  of  car-miles  per  car-hour  depends  upon 
schedules,  discipline  and  condition  of  equipment.  Higher  speed 
increases  revenue  per  car-hour  and  increases  expenses  per  car- 
hour.  It  has  no  effect  on  revenue  per  car-mile  but  it  decreases 
expenses  per  car-mile.  It  has  no  effect  on  total  revenue  but  it 
reduces  operating  expenses.  The  car-mile,  therefore,  brings  out 
this  important  element  of  operating  efficiency  more  clearly  in  the 
operating  expenses,  while  the  car-hour  has  a  similar  advantage 
in  relation  to  revenue. 

8.  Normal-maximum-cars-operated.  In  electric  Kghting  and 
power  supply  a  large  proportion  of  the  cost  of  production  varies 
directly  as  the  maximum  demand.  To  a  less  extent  this  is  true 
in  the  street  railway  business.  Our  loads  fluctuate  quite  as  much 
as  do  those  of  central  stations,  but  it  is  not  commercially,  or  in 
many  cases  physically,  possible  to  provide  corresponding  service. 
We,  therefore,  furnish  seats  during  the  non-rush  hours  and  pas- 
senger spaces  during  the  rush  hours.  Even  with  this  help  our 
service  factor  or  ratio  of  average  cars  to  maximum  is  low  and  a 
considerable  part  of  the  outgo  of  a  street  railway  is  proportioned 
to  the  number  of  cars  that  have  to  be  put  on  the  streets  during  the 
maximum  hour  of  travel.  The  car  is  a  convenient  and  common 
unit  of  equipment  costs.    It  is,  therefore,  of  interest  and  value  to 


68o  BUSINESS  STATISTICS 

know  how  much  money  a  car  takes  in  per  year  and  how  much  its 
operation  costs.  This  unit,  however,  does  not  lend  itself  to  useful 
analysis  of  the  details  of  revenue  or  of  many  of  the  operating 
expenses. 

9.  Car-trip.  The  car-trip  is  sometimes  used  for  expressing 
revenue  and  expenses  in  terms  which  can  be  easily  understood 
by  the  public.  The  compilation  of  the  number  of  trips  is  worth 
while  as  it  leads  up  to  the  average  length  of  trip  and  thus  gives  an 
indication  of  the  average  length  of  haul. 

10.  Train  units.  Train-miles  or  train-hours  have  very  little 
utility  for  electric  railway  work,  as  few  operating  expenses  vary 
with  the  number  of  trains  operated.  Where  the  motormen  on 
lines  operating  multiple-units  are  paid  higher  rates  of  wages  than 
the  other  trainmen  there  is  some  difference,  but,  after  all,  we  are 
trying  to  operate  car-hours  and  car-miles  cheaply  and  we  do  not 
have  much  control  over  the  rate  of  wages  —  so  that  if  wages  of 
motormen  per  train-hour  are  high  it  simply  means  that  the  rate 
of  wages  is  high  and  gives  no  indication  of  efficiency  of  operation. 

In  the  writer's  opinion,  trailers  should  be  treated  exactly  as 
motor  cars,  if  they  provide  the  same  passenger  capacity.  By  so 
doing,  the  economy  or  lack  of  economy  in  using  them  may  be 
shown. 

Reviewing  the  advantages  and  disadvantages  of  the  various 
units,  we  see  that  percentage  of  gross  earnings  is  always  a  useful 
basis  for  the  analysis  of  operating  expenses;  that  the  unit  revenue- 
passenger  would  be  satisfactory  if  proper  values  could  be  deter- 
mined for  varying  length  of  haul,  density  of  traffic  and  load  factor; 
that  the  passenger-mile  is  not  practicable  on  account  of  the 
approximations  necessary  in  calculating  the  passenger-mileage; 
that  the  seat-mile  and  car-mile  may  be  completely  satisfactory 
as  a  basis  of  comparison  if  the  efficiency  of  operating  schedules 
can  be  determined;  that  the  car-hour  is  useful  for  comparing 
revenue;  that  the  ton-mile  is  not  generally  useful;  and  that  the 
normal-maximum-cars  applies  to  a  portion  only  of  the  operating 
expenses.  If  operating  schedules  be  held  to  a  standard  of  effi- 
ciency with  relation  to  the  average  length  of  haul  per  passenger 
and  density  of  traffic,  then  these  two  factors  are  eliminated  and 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  68 1 

cost  per  seat-mile  on  one  property  becomes  directly  comparable 
with  that  of  another.  The  seat-mile  is  a  somewhat  inconvenient 
unit  for  analysis  of  both  revenue  and  operating  expenses,  as  the 
values  are  so  small.  To  use  it  practically,  therefore,  we  should 
have  to  use  multiples  of  possibly  50  or  100.  A  reasonable  method 
might  be  to  estabhsh  a  car  standard  of  forty  or  fifty  seats  and 
modify  the  car-mileage  accordingly,  producing  a  unit  which  might 
be  called  "  40-seat  car-mile."  This  unit  would  give  a  good  basis 
of  comparison  between  properties,  not  only  in  total  cost  per  unit 
but  in  each  of  the  details.  There  would  probably  be  objection 
to  such  a  unit,  on  the  score  of  cost  of  compilation.  This  extra 
cost,  however,  could  be  made  slight  by  the  use  of  tabulated 
equivalents. 

There  is  no  unit,  however,  which  furnishes  a  completely  satis- 
factory basis  for  comparison  of  all  items  of  operating  expenses  or 
even  of  all  groups  of  items.  That  is  to  say,  the  "  40-seat  car- 
mile,"  as  applied  to  track  maintenance  accounts,  shows  the 
maintenance  necessary  for  the  passage  of  one  car  over  a  mile  of 
track. 

The  density  of  traffic  or  niunber  of  car-miles  over  each  mile  of 

track  has  a  considerable  effect  on  the  cost  per  car-mile.    That  is, 

if  the  car-mileage  per  mile  of  track  be  low,  certain  fixed  expenses 

will  be  higher  per  car-mile.    If,  on  the  other  hand,  the  car-mileage 

per  mile  of  track  be  high,  there  will  be  more  wear  and  tear  and 

certain  of  the  maintenance  costs  will  be  higher  per  car-mile.    It  is 

so  difficult  to  judge  offhand  the  opposite  effect  of  these  factors 

on  the  cost  per  car-mile  that  many  people  who  have  to  consider 

such  matters  go  back  to  the  fundamental  basis  of  maintenance  of 

track  per  mile  of  track.     Similarly:  — 

Maintenance  of  equipment  is  properly  figured  per  car 

Power per  kilowatt-hour 

Platform  wages per  car-hour 

Other  operation  of  cars per  car 

and  general  expenses  may  be  usefully  treated  in  the  same  manner 
as  overhead  charges  on  construction  work  —  that  is,  as  a  per- 
centage of  all  other  operating  expenses.  The  important  item 
of  damages  might  better  be  classed  by  itself  and  figured  per 
passenger. 


682  BUSINESS  STATISTICS 

Establishment  of  Standard  Values 

If  the  operating  expenses  of  all  companies  were  regularly 
analyzed  in  this  manner,  it  would  be  possible  to  establish  stand- 
ard values  for  each  group  of  accounts,  making  allowance  for  the 
variation  caused  by  lesser  differences  in  conditions.  For  example, 
the  cost  of  adequate  maintenance  of  way,  track  and  line  per  mile 
of  track  could  be  determined  for  various  amounts  of  car-miles  per 
mile  of  track.    Further  refinements  might  then  be  made  for:  — 

Percentage  of  special  work. 
Percentage  of  paving. 
Average  weight  of  rail. 
I  Average  age  of  rail. 

This  will  eliminate  the  principal  conditions  which  are  fixed 
naturally  or  by  engineering  design  and  thus  may  be  shown  the 
limits  within  which  the  operating  manager  should  work.  In  the 
same  way,  normal  cost  of  maintenance  of  equipment  per  normal 
maximum  car  operated  may  be  determined  for  cars  of  various 
capacities  and  for  various  amounts  of  car-mileage  per  car.  Rea- 
sonable limits  for  the  remaining  groups  of  operating  expenses 
may  also  be  determined  for  varying  conditions.  It  is  suggested 
that  the  determination  of  such  standards  is  a  useful  field  for  this 
Association.  It  goes  without  saying  that  a  manager  searches 
every  nook  and  cranny  of  his  expense  account  to  learn  where 
reductions  of  any  kind  are  possible,  but  it  will  always  help  him  if 
he  knows  definitely  what  other  people  are  doing  on  the  same 
basis  and  he  is  often  harassed  by  having  details  of  his  property 
compared  unfavorably  with  others  where  the  conditions  are 
distinctly  different. 

The  reduction  of  operating  expenses  to  the  above  units  would 
permit  of  ready  and  comparatively  accurate  computations  of  the 
net  earnings  of  various  operated  routes  or  lines,  where  many  lines 
of  different  length  and  character  are  operated  under  one  system. 
This  might  be  done  with  profit  once,  twice,  or  four  times  per  year. 

Such  unit  computations  would  have  little  value  when  applied 
to  monthly  expenses  and  if  used  every  month  should  be  applied 
to  the  operating  expenses  for  the  past  twelve  months. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  683 

Units  appropriate  to  smaller  groups  of  accounts,  or  even  to 
individual  accounts,  might  be  used  if  desired,  as,  for  example,  the 
number  of  feet  of  special  work  applied  to  the  cost  of  maintenance 
of  special  work,  or  the  car-mileage  applied  to  the  damages  other 
than  passenger. 

With  any  statement  or  analysis  of  operating  expenses  it  is  abso- 
lutely necessary  that  a  statement  of  operating  statistics  should  be 
presented,  together  with  all  of  those  statistical  relations  upon 
which  the  details  of  operating  expenses  depend.  This  is  seldom 
or  never  done  in  a  systematic  manner.  Such  statistics  not  only 
are  necessary  in  order  to  form  a  correct  opinion  of  operating 
efficiency  but  they  have  features  and  items  which  are  as  valuable 
as  the  details  of  operating  expenses  themselves. 

The  suggested  unit  "  normal-maximum-cars-operated  "  is  de- 
fined as  the  average  for  the  four  weeks  of  a  month  of  the  maxi- 
mum number  of  cars  run  in  regular  service  on  the  heaviest  day 
of  each  week. 

The  suggested  "  service  factor  "  is  the  ratio  of  the  average 
number  of  cars  to  the  normal  maximum  and  is  derived  by  divid- 
ing the  total  car-hours  by  the  number  of  car-hours  that  would 
have  been  made  by  the  normal  maximum  number  of  cars  operat- 
ing a  full  day  of  twenty-four  hours.  This  factor  corresponds  to 
the  load  factor  of  a  power  plant. 

There  are  doubtless  other  relations  of  statistical  units  to  each 
other  which  would  be  worth  the  cost  of  calculation  once  a 
month. 

An  approximate  determination  of  the  passenger-mileage  of  any 
line  or  system  is  not  difficult  or  expensive.  It  is  a  reasonable 
assumption  that  the  character  of  traffic  on  normal  days  of  each 
season  of  the  year  is  about  the  same  from  day  to  day  and  that  the 
character  of  travel  on  one  car  will  average  the  same  as  that  of 
another.  In  making  such  a  determination,  therefore,  it  is  only 
necessary  to  place  observers  on  one  car  in  every  six  or  seven  on 
a  given  line  for  an  entire  day  and  count  the  passengers  on  and  off 
at  each  stop.  The  calculation  of  passenger-mileage  is  then  simple 
and  if  done  graphically  shows  other  valuable  information,  such 
as  the  point  of  maximum  load,  the  ratio  of  number  of  passengers 


684  BUSINESS  STATISTICS 

carried  past  the  maximum  load  point  to  the  total  carried  and  the 
points  at  which  turn-backs  should  be  permissible.  This  can  all 
be  done  at  a  cost  of  not  over  $25  per  route  of  average  density  of 
traffic. 

The  compilation  of  statistics  is  usually  treated  either  too  lightly 
or  too  seriously.  Many  people  fail  to  appreciate  the  value  of  an 
analytical  examination  of  figures  and  many  others  prepare  great 
masses  of  figures  and  details  which,  by  their  volume  and  lack  of 
correlation,  confuse  rather  than  instruct.  Analyses  of  accounts 
and  statistics  are  worth  while  if  they  point  the  way  to  saving 
money  or  if  they  present  an  accurate  measure  of  operating  or 
engineering  efiiciency.  The  cost  of  the  clerical  work  involved, 
however,  must  not  exceed  the  money  which  might  be  lost  if  such 
figures  were  not  prepared,  and  —  with  all  the  power  that  within 
us  Kes  —  the  figures  must  be  accurate.  This  means  not  simply 
that  arithmetical  details  must  be  correct  but  that  the  basis  of  the 
figures  shall  be  sound  and  consistent.  There  is  a  deeply  rooted 
prejudice  against  approximations,  but  few  deductions  can  be 
drawn  from  street  railway  statistics  or  accounts  without  approxi- 
mations. We  should,  therefore,  study  the  limits  of  error  and  we 
should  not  be  afraid  to  make  approximations  when  we  know 
just  how  much  or  how  Httle  they  affect  the  answer  we  are 
seeking. 

The  recording  and  presentation  of  the  operating  results  of  a 
street  railway  still  offer  a  broad  field  for  investigation  and  thought. 

XII.    The  Function  of  Statistics  in  the  Telephone 

Business  ^ 

•  By  Walter  S.  Gifford 

It  is  only  quite  recently,  almost  within  the  last  generation,  that 
statistics  have  begun  to  play  a  vital  part  in  the  business  world. 
The  development  of  statistics  in  business  is  most  logical.  As 
business  enterprises  increased  in  size  and  scope  they  more  nearly 

1  Walter  S.  Gifford,  The  Function  of  Statistics  in  the  Telephone  Business,  pp.  5-21. 
Reprinted  by  pennission  of  the  author.  Illustrations  of  several  charts  and  forms 
are  omitted. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  685 

approached,  from  an  administrative  standpoint,  the  character- 
istics of  a  state,  so  that,  precisely  as  governments  have  for  years 
found  statistics  necessary  for  their  proper  administration,  in  a 
similar  way  the  large  organized  business  now  finds  them  quite 
indispensable.  Furthermore,  business  is  becoming  more  and 
more  of  a  science,  and  so  we  find,  as  in  the  case  of  other  sciences, 
the  need  for  statistical  data  and  methods. 

The  Bell  System  is  performing  a  public  service  throughout 
the  entire  United  States,  and  in  so  doing  is  employing  nearly 
$1,000,000,000  of  property  and  200,000  employees.  It  furnishes 
telephone  service  directly  and  indirectly  to  over  7}^  milHon 
telephones  located  in  the  homes  or  business  offices  of  millions  of 
people  living  in  over  70,000  different  places.  Imagine,  if  you  can, 
the  administration  of  such  a  business  without  statistical  data  as 
to  what  is  going  on  here  and  there,  or  as  to  the  comparative  effi- 
ciency of  one  method  of  operation  with  another,  etc.  The  75,000 
stockholders,  to  say  nothing  of  the  thousands  of  bondholders, 
would  soon  wonder  what  had  become  of  their  investments;  the 
public  would  find  the  service  demoralized;  and  the  employees 
would  soon  be  looking  for  other  positions.  Just  as  it  is  impossible 
for  one  man  to  look  at  a  forest  of  thousands  of  trees  and  remember 
the  height  of  each,  so  it  would  be  impossible  to  manage  this 
telephone  business  without  recorded  statistics. 

Organization,  A  brief  description  of  the  organization  of  the 
Bell  Telephone  System  is  necessary  to  understand  clearly  what 
part  statistics  play  therein.  To  avoid  complicated  explanations, 
the  organization  as  described  is  simplified  somewhat  from  the 
actual,  although  it  is  substantially  as  shown.  The  United  States 
is  divided  for  operating  and  administrative  purposes  into  eight 
divisions.  Each  division  has  its  own  administrative  officers  and 
working  forces,  and  keeps  its  own  accounts.  Some  of  the  divisions 
comprise  several  operating  companies.  The  American  Telephone 
and  Telegraph  Company  acts  in  a  supervisory  capacity  in  relation 
to  all  divisions. 

A  typical  organization  of  any  one  of  these  eight  main  operating 
divisions  is  illustrated  by  the  chart  on  the  next  page. 


686 


BUSINESS  STATISTICS 


It  will  be  noted  that,  aside  from  the  general  staff,  there  are  three 
operating  superintendents,  —  Commercial,  Plant,  and  Traffic,  — 
the  Commercial  busy  with  canvassiag  for  new  business,  collecting 
revenues,  determining  rates,  and  in  general  all  publicity  and 
advertising  work;  the  Plant  with  maintaining  plant  already  built 
and  with  the  construction  of  new  plant;  and  the  Traffic  with  the 


TYPICAL  ORGANIZATION  CHART  OF  AN 
OPERATING  DIVISION 

President 

Vice-President 

1 

1 

1 

1 

1 

Secretaf7. 
Treasurer 

Counsel 

General 
Manager 

General 
Auditor 

1"" 

1 

■"'I 

of  Plant 

Commercial 
Supenntendenr 

S»ipprintenderit 
of  Traffic 

Engineer 

actual  operating  of  the  exchanges  and  toll  lines,  that  is,  the 
furnishing  of  telephone  service.  The  Engineer  is  really  a  staff 
man  on  the  staff  of  the  General  Manager  and  is  not  directly  in 
charge  of  operations. 

The  statistical  problem.  Now  the  officers  of  the  Bell  Telephone 
System  have  two  main  points  of  view  from  which  they  must  plan 
their  work — one  from  the  standpoint  of  service  rendered  the 
pubKc,  the  other  from  the  standpoint  of  the  stockholder.  In 
other  words,  their  fundamental  problem  is  to  furnish  the  best 
possible  service  at  the  lowest  possible  cost  and  to  earn  a  reason- 
able return  upon  the  investment.  The  Board  of  Directors,  the 
Executive  Committee,  and  the  officers  responsible  for  the  busi- 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  687 

ness  should  know  at  all  times  to  what  extent  these  two  aims  are 
being  accomplished.  Each  employee  who  holds  a  position  of 
responsibility  should  be  acquainted  with  the  extent  to  which  he  is 
efficiently  contributing  toward  the  accomplishment  of  these  ends. 
In  such  a  highly  organized  undertaking  as  the  Bell  System,  just 
as  in  the  development  of  highly  organized  animal  life,  specializa- 
tion of  function  must  take  place.  This  means  that  all  the 
various  specializations  must  be  brought  together  at  the  executive 
office  of  the  business.  Statistics  make  such  a  centralization 
possible.  Now  in  each  Operating  Division,  as  shown  by  the 
typical  organization  chart,  we  have  a  fairly  simple  three  column 
speciahzation  of  function,  giving  three  main  subordinate  centers, 
the  Commercial,  Plant,  and  Traffic  Departments.  Each  branch, 
or  subordinate  center,  as  well  as  the  head  executive  office,  must 
know  at  all  times  whether  or  not  it  is  playing  its  part  with  the 
highest  possible  degree  of  efficiency. 

The  business  man  running  his  own  independent  business  in  a 
small  way  will  perhaps  tell  you  that  he  has  no  use  for  statistics; 
he  will  perhaps  say  that  he  carries  in  his  head  all  the  facts  that  he 
needs  to  know;  that  his  business  insight  enables  him  to  make  his 
judgment  accurate  and  profitable.  Of  course,  what  he  really 
does  is  to  rely  on  memory  and  personal  observation.  Uncon- 
sciously, then,  he  uses  statistical  data  and  methods  in  his  work, 
although  he  does  not  tabulate  them  or  record  them. 

Now  there  is  a  tendency  for  a  department  head  in  a  large  organ- 
ization to  feel  the  same  way  regarding  statistics.  There  are 
several  reasons,  however,  why  this  attitude  is  fallacious.  In  the 
first  place  a  man  may  be  promoted,  or  transferred,  or  may  resign, 
and  he  naturally  does  not  leave  behind  any  information  that  he 
has  not  recorded  in  reports  or  tables  of  some  sort.  Second,  as  a 
matter  of  fact,  he  is  not  able  to  carry  in  his  head  nearly  as  much 
information  as  he  may  think  he  can,  and  to  this  extent  his  work 
is  not  as  efficient  as  it  might  be.  Third,  it  is  difficult  for  him, 
except  by  personal  interview,  to  prove  his  efficiency  to  officials 
higher  up,  unless  he  presents  some  sort  of  statistical  reports. 
Fourth,  his  superior  may,  without  tabulated  data,  fail  to  realize 
any  improved  methods  which  the  subordinate  may  have  developed 


688  BUSINESS  STATISTICS 

and  which  would  be  of  value  to  adopt  for  similar  conditions 
elsewhere. 

A  department  head  is  busy,  and  frequently  the  compilation  of 
data  for  his  own  use,  and  particularly  the  complying  with  outside 
requests  for  data,  is,  on  the  face  of  it,  very  annoying.  This 
explains  what  is  often  believed  to  be  an  inherent  dislike  for  making 
out  reports.  Because  he  is  unable  to  see,  in  many  cases,  how 
certain  data  that  has  been  requested  can  serve  any  useful  purpose, 
he  is  inclined  to  feel  that  to  demand  of  him  the  time  to  get  it 
together  is  an  imposition.  Fortunately,  this  attitude  of  mind  can 
be  cured  by  education,  and  in  the  Bell  System  we  have  made 
marked  improvement  in  this  line,  so  that  now  it  is  fairly  safe  to 
say  that  the  main  department  heads  at  least  cheerfully  furnish 
whatever  statistical  information  may  be  requested,  and  take  keen 
interest  in  providing  for  themselves  data  which  will  help  them  in 
their  specific  work. 

Specific  departmental  statistics.  As  an  illustration  of  specific 
departmental  statistics  there  are  shown,  following,  some  of  the 
statistical  reports  in  use  in  the  three  main  operating  departments 
—  Commercial,  Plant,  and  Traffic. 

The  Commercial  Department  statistical  report  shows  most 
important  data  regarding  new  subscribers  to  telephone  service, 
and  the  total  and  average  amount  of  new  revenues  resulting 
therefrom.  [Shows  for  each  Central  or  Local  Office  District:  — 
Number  of  New  Stations,  Revenue  Value  of  New  Stations, 
Additions  other  than  Stations  to  Existing  Contracts,  Net  Gain 
in  Revenue,  Supersedures,  Cancellations,  Net  Gain,  Not  In- 
cluded in  Previous  Items,  Obsolete  Contracts,  Analysis  of 
Station  Gain,  with  numerous  subdivisions  under  each.] 

The  statistical  report  of  the  Plant  Department  —  "  Report  of 
Subscribers'  Line  Trouble"  [shows  for  each  Central  Office:  — 
C.  0.  Trouble  per  Line,  Line  Trouble  per  Line,  Station  Trouble 
per  Station,  Fd.  O.  K.  per  Station,  Test  O.  K.  per  Station, 
Average  Time  (C.  O.,  Line,  Station),  Lines.]  In  this  depart- 
ment certain  "  trouble  units  "  have  been  devised  to  furnish 
accurate  comparative  records,  so  that  an  unusual  amount  of 
trouble  may  be  at  once  apparent,  sought  out  and  remedied. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE 


689 


The  Peg  Count  report  prepared  by  the  Traffic  Department 
measures  the  volume  of  business  handled  by  the  operating  forces 
hourly  and  is,  of  course,  fundamental  to  this  department.  It 
is  of  use  in  determining  the  amount  of  apparatus  needed,  the 
volume  and  growth  of  traffic,  and  the  operating  efficiency  and 
cost. 

The  following  diagram  shows  the  results  of  a  special  study  con- 
ducted by  the  Traffic  Department.  This  is  of  interest  principally 


©o 


160 


1 40 


20 


7}Me  IN 

B                           10                          1! 

Seconds 

S                       20                       29                       30 

±5' ±^?i=":::::ii 

_..     jj^.  .                   ^'      -___  III";  !:'■ 

* 

■"  3  _-    ~ii.  -  -I    ::^5  

Z-.ZZ..±—Z)L ;...2!!- 

::::  :::::-^::;  i?!  2^::::::::: 

----  X— ^-i''-I;i^-:::::::::: 

^.a--' 

/  _/f    vn 

-B-^ -. 

<•: .      .   

1)r\      \/\ 

_  ,'_:.:       -     .  ._.  

:     ^*  _  J.z  _.     .--  _- 

^t.-.  -  -_-  .     - - 

'        / 

^*  -  ._  :.:::_:     :  :_::_:__:  : 

i           :            :  :_"«=' 

I                                <- 

|-    '                                        z 

"~                i_  -            '  J     "'. 

:  _   :  ._  -J.Z-i.  ___.,ii^ 

._^    -^ ___^,t __ 

/     /            LfT 

r                             ^     - 

---     ■-  -       t'     -'-'-^~-       -- --- 

i           f 

::  :     _jt  :^:__:::      :  ::_"  :: 

-__       J  -^        :::--              ^^ 

_. 

---*---     —      ^  ^        /\f^ 

SWERING  TIME  OF                      " 

/                              A  Operator 

5  St  Toll  Recording  Opers. 

---         LJL~~         \-TollRtCor 

lin^  OptratOM  uncfar  SupTvhion          -~     

ivit/>out        ' 

N9  ovtr/oaa                                          .  _     

' 

1        ^ 

f        / 

B    / 

1  I 

because  it  shows  how  statistics  may  show  up  a  practical  condition 
in  a  most  graphic  manner. 

Now  it  is  obvious  that  the  statistical  data  just  represented  is  of 
assistance  in  the  administration  of  each  department.  It  is  also 
obvious  that,  while  each  report  or  diagram  tells  the  story  for  the 
functional  purpose  for  which  it  was  designed,  no  one  of  them  quite 
tells  the  whole  story. 

Regular  administrative  statistics.  So  far  we  have  concerned 
ourselves  with  examples  of  the  use  of  statistics  in  the  operating 


690  BUSINESS  STATISTICS 

departments.  Up  to  this  point  it  might  be  said  that  there  is  no 
particular  need  for  a  statistician  or  a  department  engaged  exclu- 
sively on  statistical  work.  The  results,  however^  of  the  work  done 
in  these  functional  departments  must  be  correlated  and  presented 
to  the  executives  in  such  a  manner  as  to  be  of  practical  use  to 
them  in  running  the  business  as  a  whole.  This  means,  among 
other  things,  the  correlating  of  the  accounting  with  the  statis- 
tical data  on  operating  results.  We  must  know  whether  we  are 
earning  a  reasonable  return  on  our  investment,  as  well  as  whether 
we  are  giving  a  first-class  service  to  the  public  at  a  reasonable 
cost.  The  furnishing  of  data  to  show  this  is  not  entirely  account- 
ing work,  nor  is  it  the  duty  of  any  one  of  the  three  departments 
previously  mentioned.  It  appertains  to  the  business  as  a  whole, 
and  is  the  duty  of  the  Statistical  Department. 

The  table  opposite  (Monthly  Report  No.  i)  is  perhaps  our  most 
highly  condensed  regular  statistical  report. 

In  this  report  are  the  main  items  (so  far  as  we  have  yet  devel- 
oped them)  needed  by  the  Executive  to  form  an  opinion  as  to  how 
the  business  is  going  to  appear  in  condensed  form.  The  percentage 
of  increase  in  "  Physical  Property,"  in  "  Telephone  Revenue,"  in 
"  Total  Telephone  Expenses  "  and  in  "  Net  Telephone  Earnings  " 
show  how  the  business  is  running  now  as  compared  with  the  pre- 
vious year.  The  actual  figures  show  how  much  is  being  earned 
this  month  and  to  date  this  year  in  excess  of  dividend  require- 
ments and  whether  the  Company  or  Division  is  earning  a  rea- 
sonable return  on  the  investment.  Assuming  that  these  financial 
results  are  not  all  that  are  wished  for,  various  items  under  Per- 
centages show  in  a  general  way  where  the  trouble  is.  Near  the 
bottom  of  the  report,  the  development  of  the  business  is  brought 
out  by  the  number  of  stations  and  the  number  per  100  population, 
thus  partly  telling  the  story  from  the  standpoint  of  the  public, 
inasmuch  as  an  increase  in  the  number  of  subscribers  means 
directly  an  increase  in  the  service  to  the  public. 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  69 1 

Monthly  Report  No.  i 
COMPANY  A 

Condensed  Summary  of  Reports  for 1913  ^ 

Assets  Liabilities 

At  end  of  month,  Increase  over  last  month,  Increase  over  Dec.  31,  1912,  Per  cent  over  Dec.  31, 
Increase  over  same  month  last  year. 

Intangible  Capital  Capital  Stock 

Physical  Property  Funded  Debt 

Investments  Advances  from  System  Corporations 

Cash  and  Deposits  Current  Payables 

Current  Receivables  Deferred  Credit  Items 

Deferred  Debit  Items  Reserves  for  Depreciation 

Total  Surplus 

Total 

Earnings  and  Expenses 

This  month,  Increase  over  last  month,  9  months  since  Dec.  31,  1912,  Increase  over  same  period, 
1912,  Per  cent  increase. 

Exchange  Revenues  Net  Telephone  Earnings 

Toll  Revenues  Sundry  Net  Earnings 

Total  Telephone  Revenue  Total  Net  Earnings 

Operation  Expenses  Deduct  Interest 

Current  Maintenance  Balance  Net  Profits 

Depreciation  Deduct  Dividends  (Paid  and  Accrued) 

Taxes  Undivided  Profits 

Total  Telephone  Expenses 

Av.  Monthly  Tel.  Revenue  per  Station 

Annual  Dividend  Rate  6  %  Total  plant  per  station  at  end  of  month,  At  Dec.  31, 1912 

Percentages  (Annual  Basis) 

This  month.  Last  month,  9  months  1913,  9  months  1912. 
Telephone  Revenue  to  Average  Plant  in  Service 
Operation  Expense  to  Telephone  Revenue 
Telephone  Expense  to  Telephone  Revenue 
Current  Maintenance  to  Average  Plant  in  Service 
Depreciation  to  Average  Plant  in  Service 
Net  Telephone  Earnings  to  Average  Plant  in  Seivice 
Total  Net  Eammgs  to  Average  Capital  Obligations 
Balance  Net  Profits  to  Average  Capital  Stock 

Stations 

Total  at  end  of  month,  Per  100  population,  Net  gain  this  month.  Net  gain  9  months  since  Dec.  31, 
1912,  Per  cent  net  gain,  expected,  realized,  Per  cent  stations  over  same  date  1912. 

Owned  Stations 

Connecting  Stations  (incl.  Service  and  Private  Line) 

Total 

Wire  Mileage  at  end  of  month 

Exchange,  Per  cent  increase  over  Dec.  31,  1912,  Toll,  Per  cent  increase  over  Dec.  31,  1912,  Total, 
Per  cent  increase  over  Dec.  31,  1912,  Per  cent  increase  over  same  date  1912. 

Miles  of  Wire 

»  Only  the  list  of  items  has  been  reproduced.     [Editor.] 


692  BUSINESS  STATISTICS 

Now  it  is  desirable  to  have  a  statistical  report  that  will  show 
how  efficient  different  companies  or  divisions  are  as  compared 
with  each  other.  The  following  report  is  designed  with  this  in 
view.  Practically  all  general  statistical  units  (both  cost  and 
service  units)  that  seem  apphcable  to  the  telephone  business 
appear  on  this  two-page  report.  Different  divisions  have  of 
course  different  conditions  to  meet,  so  that  it  is  not  correct  to 
make  final  judgments  of  efficiency  on  the  basis  of  statistical  units 
only.  However,  if  this  report  is  intelligently  used,  it  will  aid 
effectively  in  locating  inefficiency.  Moreover,  regardless  of  dif- 
ferent conditions  to  be  met,  each  company  or  division  must,  before 
being  regarded  as  efficient,  earn  a  reasonable  return  and  how 
near  it  comes  to  doing  so  is  brought  out  by  this  report. 

BELL  TELEPHONE  SYSTEM  IN  UNITED  STATES 
Comparisons  by  Companies 

Percentages  (Annual  Basis) : 
As  reported: 

Telephone  Revenue  to  Average  Plant  in  Service 
Operation  Expense  to  Telephone  Revenue 
Telephone  Expense  to  Telephone  Revenue 
Current  Maintenance  to  Average  Plant  in  Service 
Depreciation  to  Average  Plant  in  Service 
Net  Telephone  Earnings  to  Average  Plant  in  Service 
Total  Net  Earnings  to  Average  Capital  Obligations 
Balance  Net  Profits  to  Average  Capital  Stock 
As  Adjusted  for  Uniform  Depreciation: 
Telephone  Revenue  to  Average  Plant  in  Service 
Operation  Expense  to  Telephone  Revenue 
Telephone  Expense  to  Telephone  Revenue 
Current  Maintenance  to  Average  Plant  in  Service 
Depreciation  to  Average  Plant  in  Service 
Net  Telephone  Earnings  to  Average  Plant  in  Service 
Total  Net  Earnings  to  Average  Capital  Obligations 
Balance  Net  Profits  to  Average  Capital  Stock 

Percentage  Increases  over  Previous  Year: 
Physical  Property  at  end  of  period 
Telephone  Revenue 
Telephone  Expense  (as  reported) 
Net  Telephone  Earnings  (as  reported) 
Company  Stations  at  end  of  period 
Company  and  Connecting  Station  at  end  of  period 
Miles  of  Owned  Wire  at  end  of  period 


REPORTS  FOR  THE  CHIEF  EXECUTIVE  693 

Per  Station  Earnings  and  Expenses: 
(Averages  per  Month) 
Exchange  Revenue 
Toll  Revenue 
(Toll  Rev.  A.  T.  and  T.  and  Associated  Companies) 

Total  Telephone  Revenue 
Operation 

Current  Maintenance 
Depreciation  (as  reported) 
Taxes 

Total  Telephone  Expenses 
Net  Telephone  Earnings  (as  reported) 

Exchange  and  Toll  Revenue  per  100  Population: 
(Averages  per  Month) 
Exchange  Revenue 
Toll  Rev.  A.  T.  and  T.  and  Associated  Companies 

Total 

Plant  per  Station: 
At  end  of  period 
December  31,  191 2 

Stations  and  Wire  Mileage  per  100  Population  at  End  of  Period: 
Company  Stations 
Connecting  Stations 

Total  Company  and  Connecting  Stations 
Per  cent  Company  and  Connecting  of  all  Stations 
Wire-Mileage  Owned 

The  foregoing  report  is  also  used  in  any  one  company  to  com- 
pare one  month  with  previous  months  or  previous  periods,  thus 
showing  improvements  or  decline  in  efficiency.  To  make  the 
more  significant  items  readily  available  for  reference,  it  is  our 
practice  to  make  up  certain  small  charts  of  a  size  that  can  be 
carried  in  the  pocket  which  present  graphically  some  of  the 
results  that  appear  on  these  Statistical  Unit  Reports  for  a  period 
of  months  and  years.  It  is  thus  possible  to  have  at  hand  in  a 
compact  form  the  main  facts  about  any  one  company  or  the  entire 
system. 

Special  administrative  statistics.  It  is  part  of  the  duty  of  a 
statistician  to  be  constantly  in  contact  with  other  departments  of 
the  business  and  to  be  on  the  alert  for  any  new  interesting  point 
of  view  that  would  show  more  clearly  than  before  some  particular 


694 


BUSINESS  STATISTICS 


phase  of  the  business  which  could  be  improved  or  changed  to 
advantage.  For  example  a  chart  [is  prepared  which]  compares 
the  disposition  of  Gross  Revenues  in  various  telephone  companies 
and  divisions. 

So  far  I  have  talked  mostly  about  the  direct  administrative 
work.  It  is  obvious,  however,  that  in  a  business  as  large  as  the 
Bell  Telephone  System  needs  for  special  reports  or  special  infor- 
mation for  use  before  Government  bodies  or  for  the  public  press, 
or  for  our  own  general  information,  are  innumerable.  A  table  such 
as  the  following  is  of  interest  in  showing  to  a  Public  Service  Com- 
mission or  to  the  public  in  general  that  telephone  rates  have  gone 
down  while  the  service  furnished  has  increased. 


Bell  Telephone  System  in  the  United  States 

189s 

1 900 

190S 

1910 

1912 

Average  exchange  rates 

Average  number  of  sub- 
scribers per  exchange. . .  . 

$69.75 
172 

$44.68 
276 

$33.31 
490 

$31.28 
782 

$30.93 
957 

General  administrative  statistics.  In  order  that  an  executive 
may  have  the  broadest  possible  outlook,  it  is  necessary  constantly 
to  correlate  the  telephone  business  with  outside  activities.  A 
chart,  for  instance,  has  been  made  up  to  show  how  general 
business  is  nmning  from  month  to  month  as  compared  with 
normal  business.  If  the  telephone  business  should  begin  to  fall 
off  greatly  when  general  business  is  good  or  improving,  this  would 
give  us  the  signal  to  investigate  the  causes. 

Somewhat  related  to  the  last  chart  is  one  which  compares  the 
increase  in  the  telephone  business  with  the  increase  in  general 
business  and  with  crop  productions  over  a  period  of  years. 

The  chart  below  is  a  particularly  interesting  example  of  sta- 
tistical graphics  inasmuch  as  to  get  a  true  comparison  we  have 
departed  from  actual  figures  but  with  their  use  have  made  up 
imaginary  "  normal  "  figures  which  may  be  compared  at  any  year 
and  which  will  give  a  much  more  truthful  idea  of  the  comparative 
growth  than  the  actual  figures  could  possibly  do.    In  the  chart 


REPORTS  FOR  THE  CHIEF  EXECUTIVE 


69s 


the  light  lines  are  plotted  from  the  actual  figures  and  the  heavy 
lines  from  the  normal  figures.  The  diagram  is  also  remarkable 
for  showing  the  great  steadiness  of  the  telephone  business  as 


480r— 

1  1  1  1  1  1  1  1  1  1  1  1  1  M 

""■ 

^ 

f/f 

■^ 

~" 

n 

n 

— 

■— 

— 

460 

A  COMPARISON  OF  THE 

GROWTH  OF  THE  BELL  TELEPHONE  BUSINESS  WITH 

GENERAL  BUSINESS  AND  CROPS 

1898  -  1912 

/ 

~" 

i 

/ 

r 

J 

f 

/ 

1 

r 

NOTC- 

TH£  LI6HT  LINES  SHOW  ACTUAL  GROVmi, 
THE  HEAVY  LINES  NORMAL  GROWTR 

> 

/ 

360 

i 

^ 

/ 

340 

i 

y 

/ 

' 

y 

' 

.'^ 

/ 

280  T- 

r 

i 

2H^    S 

& 

/ 

// 

240  ■ 

> 

L 

r 

% 

1 

»n  . 

3 

i 

f 

\ 

?^ 

/ 

^4 

f 

3 

< 

J 

/ 

180    ' 

& 

.>> 

f 

"\ 

b 

/ 

^,c 

^\ 

160 

^ 

> 

r 

\^i 

A- 

i 

/ 

ry 

^<5^ 

/ 

«/ 

A 

if^ 

i 

/■ 

^ 

/ 

5^v 

/^ 

^ 

120 

s 

/ 

^1 

^ 

,«i^ 

f 

^-^ 

«?■ 

^ 

<:? 

/ 

"^ 

y;o 

X 

' 

/ 

^ 

/ 

<=>"' 

tV^' 

/ 

^ 

/ 

^ 

f 

i*?"' 

/ 

K' 

/ 

?^ 

^^ 

.»^ 

ir 

> 

^ 

^^' 

^ 

?* 

/ 

/ 

X 

p^ 

r\\ 

jn 

/ 

t' 

"^ 

^ 

HD 

fO' 

TO 

iC 

5W 

tttt 

/ 

^ 

;2 

'x\ 

:U 

S( 

yJ\ 

EP 

or 

s. 

— 

-? 

^ 

•3f\ 

2 

y 

1 

s£ 

/ 

- 

)>f 

— f 

r 

-" 

y' 

<f^ 

c 

^ 

^ 

p= 

A 

gj^ 

- 

□ 

E3 

d 

□ 

_ 

_ 

_ 

J 

_ 

_ 

__ 



_ 





_ 

_ 

__ 

J 

_ 

YEARS 


compared  with  the  others,  the  actual  and  the  normal  curves  being 
almost  coincident. 

Originating  new  statistics.  In  addition  to  the  foregoing  work 
done  under  the  direct  supervision  of  the  Statistician,  there  is  an 
additional  duty  which  falls  upon  him,  due  to  the  fact  that  his 


696  BUSINESS  STATISTICS 

position  is  a  general  staff  position.  It  is  not  only  his  duty  to 
compile  statistics  which  should  be  compiled  periodically  and 
permanently  under  his  jurisdiction,  but  also  under  certain  con- 
ditions to  do  pioneer  work  that  may  later  belong  to  some  one  of 
the  operating  departments  of  the  business. 

For  instance  —  several  years  ago  the  Statistical  Department 
of  the  Bell  System  started  records  on  telephone  rates  in  effect  in 
all  Bell  exchanges  of  the  country.  After  the  statistical  forms  had 
been  devised  and  the  records  obtained  for  the  first  time,  this  work 
was  then  turned  over  to  the  Commercial  Department. 

A  year  ago  data  was  collected  on  all  of  the  200,000  employees  of 
the  system  with  a  view  of  estimating  the  cost  of  certain  benefit 
plans  which  were  then  under  consideration  and  later  adopted. 
Now  we  are  busy  in  connection  with  these  plans  in  building  up 
statistical  records  which  will  enable  us  to  study  occupational 
diseases,  if  any,  and  causes  of  accidents.  Information  must  be 
provided  as  a  basis  for  determining  the  probable  cost  of  the  plan 
in  the  future  or  the  cost  of  any  changes  which  may  appear  desir- 
able from  time  to  time.  Whether  this  work  will  be  so  specialized 
and  grow  to  such  a  size  that  it  will  be  advisable  to  have  it  in  a 
department  by  itself  remains  to  be  seen.  At  any  rate  the  work  of 
first  devising  the  statistical  methods  and  putting  the  statistical 
plans  in  operation  is  the  duty  of  the  Statistician. 

The  statistical  work  done  in  the  Bell  Telephone  System  has 
been  only  touched  upon.  A  description  of  statistical  methods  or  a 
detailed  analysis  of  the  valuable  results  obtained  from  the  various 
statistical  charts  and  tables  has  not  been  attempted.  Simply  the 
function  of  statistics  and  the  duty  of  the  Statistician  in  the  busi- 
ness have  been  described.  Statistical  work  constantly  requires 
imagination  coupled  with  reason,  a  continual  search  for  new  items 
of  interest,  new  sources  of  information,  and  better  or  clearer 
methods  of  presentation. 


-.Jjy\C 


k 


14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 

LOAN  DEPT. 

This  book  is  due  on  the  last  date  stamped  below,  or 

on  the  date  to  which  renewed. 

Renewed  books  are  subject  to  immediate  recall. 


30Ju1'6jDC 


rECT)  L-Pf 


'S7  -a  P*'^ 


^wt 


1 6 1963 


m  1  ^ 


7/ 


3/;'%^ 


REC'D  LD 


13'B3-.^PM 


6M9y'64BE 


REC'D  LP 


mi    '64 -4PM 


itAR15lSS7  8  3. 


LD  21A-50m-ll,'62 
(D3279sl0)476B 


General  Library 

University  of  California 

Berkeley 


^mm 


ID   U0^7 


^ 


1  GoS'l9> 


C7 


THE  UNIVERSITY  OF  CALIFORNIA  LIBRARY 


